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If both ending inventory and purchases are understated by $10,000 at the end of the year,...

If both ending inventory and purchases are understated by $10,000 at the end of the year, how are COGS, net income, and retained earnings affected in the current year?

Can you please explain why, im having a bit of trouble understanding the current year effect in inventory (B.I, PURCHASES, GAS, E.I, COGS).

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Answer #1

If both ending inventory & purchases are understated by $10000 then there is no effect on the COGS, net income & retained earnings because in the trading account both items will come on the opposite side and these are also calculated on the cost basis which means when purchases decreases then there will be a decrease in the closing stock also, So in given case if there is a decrease of $10000 then same will be the difference which result in no effect on COGS, net income & retained Earnings. This is the reason you are having trouble understanding the current year effect in inventory.

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