Charles Scrab Inc. has beginning inventory of $15,000, purchases of $25,000, and ending inventory of $10,000, sales of $75,000, operating expenses of $30,000, and a tax rate of 40% for 2008. An accounting clerk input the ending inventory as $12,000. What is the effect on 2008 net income?

Question

Quizplus · Accepted Answer

The ending inventory was understated by $2,000 ($12,000 - $10,000). This means that the cost of goods sold was overstated by $2,000, which in turn means that net income was understated by $1,200 ($2,000 x 40% tax rate).