After the financial statements were prepared for 2012, Wickham Ltd.discovered that an error had been made during the year-end inventory count and one room containing $40,000 worth of goods, at cost, had been missed.A review of the accounting records showed that all purchases had been recorded.The company's tax rate is 40%.If the error is not corrected, what would be the effect of this error on 2012 net income?
A)$16,000 understated
B)$24,000 overstated
C)$24,000 understated
D)No effect in 2012

Question

Quizplus · Accepted Answer

The error resulted in an understatement of the ending inventory, which in turn would cause an understatement of cost of goods sold and an overstatement of gross margin for the year. Since net income is calculated by deducting all expenses from gross margin, an overstatement of gross margin would result in an overstatement of net income. Therefore, the error would have a negative effect on net income which is $24,000 ($40,000 x 60%) understated.

After the Financial Statements Were Prepared for 2012, Wickham Ltd