Overestimate the profitability of the business, Accounting Basics

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In Exhibit the accurately stated ending inventory for the year 2009 is USD 35000. As a result Allen has a gross margin of USD 135000 as well as net income of USD 50000. The statement of retained earnings demonstrates beginning retained earnings of USD 120000 and an ending retained earnings of USD 170000. When the ending inventory is overstated by USD 5000 as published on the right in Exhibit 44 the gross margin is USD 140000 and net income is USD 55000. The statement of retained earnings after that has ending retained earnings of USD 175000. The ending inventory overstatement of USD 5000 origins a USD 5000 overstatement of net income and a USD 5000 overstatement of retained earnings. The balance sheet would illustrate both an overstated inventory and overstated retained earnings. Because of the error in ending inventory both the stockholders and creditors may overestimate the profitability of the business.

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