Question

Q-mart failed to include inventory that was kept in a separate warehouse in its end-of-the-period inventory count. Explain how this error will affect this year's balance sheet. (Check all that apply.)

Answer 1

Total assets and Total equity will be this year's understated.

• In accounting, an understatement occurs when liabilities are devalued to less than their true cost or when firm assets are valued below their fair market worth.
• Either option leads to an erroneous assessment of a company's financial situation.
• On the other hand, understated inventory raises the cost of products sold.
• Lower inventory volume in the accounting records reduces the closing stock and effectively increases the COGS.

• A lower amount of inventory is on hand than what is really in stock, according to an understated inventory.

What happens if equity is overstated?

• If the company overstates the value of its assets, it's going to show up on the other side of the equation as an increase in owner's equity.
• It won't have any effect on liabilities.

Learn more about equity

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