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Assuming both ending inventory and purchases and related accounts payable are understated in 2017, (assume this...

Assuming both ending inventory and purchases and related accounts payable are understated in 2017, (assume this purchase was recorded and paid for in 2018), why is Net Income in 2018 not effected. Thanks!

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Answer #1

Let us assume that inventory of $10,000 was purchased on account in 2017 but it was omitted to be recorded. Now, this purchase of $10,000 is recorded and paid in 2018. It will have following affects on the financial statements in 2018:

Purchase will increase by $10,000

Ending inventory will increase by $10,000

Hence, Cost of goods sold will remain unaffected in 2018 since it will increase and decrease by the same amount.

Hence, net income in 2018 will remain unaffected.

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