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.)
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.
