During the taking of its physical inventory on August 31, 2019, Kate Interiors Company incorrectly counted its inventory as $366,900

During the taking of its physical inventory on August 31, 2019, Kate Interiors Company incorrectly counted its inventory as $366,900 instead of the correct amount of $378,500. 

Indicate the effect of the misstatement on Kate Interiors’ August 31, 2019, balance sheet and income statement for the year ended August 31, 2019.

Answer:

Balance Sheet: Merchandise inventory understated*..................... Current assets understated.................................... Total assets understated....................................... Owner’s equity understated................................. Income Statement: Cost of merchandise sold overstated..................... Gross profit understated....................................... Net income understated....................................... * $378,500 – $366,900 = $11,600