Question

Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error affects the current year's income statement. (Check all that apply.) The current year's net income will be too high. The current year's cost of goods sold will be too high. The current year's cost of goods sold will be too low. The current year's net income will be too low.

Answer 1

Answer:

• The current year's net income will be too low.
• The current year's cost of goods sold will be too high.

Explanation:

1. Note that, the Net income of a company often depends solely on the valuation of their ending inventory. Since Q-mart made an error by not reporting the inventory kept in separate warehouse it has in effect reduce the monetary value of inventory carried forward into the current year.

2. The cost of goods sold is gotten from comparisons of total revenue and the total expenses. Since Q-mart understated it's ending inventory, the balance sheet would show a higher value for the cost of goods sold.