Assume that during the physical count of the inventory of a large corporation for this year, $450,000 of merchandise was counted twice. The error was not detected, and the financial statements were prepared. Identify the individual statements that would be affected and explain the effect the count error would have on each. (Omit income tax considerations.)
The double-counting of merchandise would cause the merchandise inventory amount shown on the balance sheet to be overstated by the $450,000 error. Consequently, total assets would be overstated by the same amount. The error would also cause cost of goods sold and gross margin on the statement of earnings to be understated and overstated, respectively. The error would carry all the way through to the bottom of the income statement where the income before income taxes would be overstated by $450,000. The statement of stockholders' equity would show an overstated income after taxes as an increase to retained earnings. Thus total stockholders' equity would also be overstated on the balance sheet.
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