This will have understate net income on the reported amount of net income in the year of the error.
What is understate net income?
Understating net income makes the company appear less successful, and hence less advantageous. Even so, there have been cases where officials intentionally chose to understate it. The top of the income statement deals with the income for that time.
Understated amounts show a reported amount is wrong and the reported amount is less than the true amount. For example, an accountant may release a statement saying a company’s inventory account has an understated balance. This indicates the reported balance — $10,000, for example — should actually be $14,000. Two accounts will have this inaccuracy as double-entry accounting requires two accounts to be in every entry an accountant posts into the general ledger.
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