During the taking of its physical inventory on December 31, 20xx, Mary’s Boutiqu

Question

During the taking of its physical inventory on December 31, 20xx, Mary’s Boutique incorrectly counted its inventory as $360,000 instead of the correct amount of $280,000.   The effect on the balance sheet and income statement would be:

Please fill in the following blanks by stating overstated or understated by $xxx

Part 1: Assets ___________ by ___________
Part 2: Retained Earnings ___________ by ___________
Part 3: Net Income ___________ by ___________

In order to earn credit for your answers to the problems, you are required to show all supporting work.

Explanation / Answer

Part 1: Assets Increases by 80000.

Closing Inventory is a current asset, hence increase in closing inventory by 80000 (360000-280000) will result in increase in asset.

Part 2: Retained Earnings Increase by 80000

Increase in closing inventory results in Increase in gross profit because of which net profit also increases. Net profit is ultimately added to retained earnings which result in increase in retained earnings by 80000 (360000-280000)

Part 3: Net Income Increases by 80000

Increase in closing inventory results in Increase in gross profit because of which net profit also increases.

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