An understatement of the inventory balance usually causes an understatement in equity and net income, which makes the company appear less profitable. An understated inventory balance increases a company's cost of goods sold as compared to sales, which reduces net income.Continue Reading
An understated inventory balance may make a company look like a bad investment, or vice versa. This may either attract or drive away potential investors based on the wrong information. A company should monitor its inventory count to ensure there is no miscount, which is the main cause of an understated inventory balance. An inventory miscount also affects the next accounting period in reverse as an understated inventory balance becomes overstated. This results in an understated cost of goods sold and total expenses, while net income and equity become overstated.
In some cases, incorrect costing may create an understated inventory balance with the same impact as a quantity miscount. In other cases, employees may steal from a company, reducing the inventory, which has the same effect as an inventory understatement.
A business should implement an inventory tracking system that operates on a consistent schedule to minimize the chances of an inventory understatement. An automated inventory system can simplify the management of inventory by maintaining consistent inventory levels.Learn more about Accounting
A balance sheet contains assets, liabilities and shareholder's equity. Assets can either be current or long-term depending on how easy it is for a company to sell or liquidate them. Liabilities refer to the money that non-shareholders have lent to the company; liabilities can be current or long-term depending on the amount of time before they are due. Shareholders' equity, also known as net assets, refers to the money that the company shareholders own.Full Answer >
A balance sheet, income statement, statement of owner's equity and the statement of cash flows are each examples of financial statements. These four types of financial statements are used by businesses for reporting as required by the authoritative set of standards known as the U.S. Generally Accepted Accounting Principles and have been officially adopted by the Securities and Exchange Commission, according to QuickMBA.Full Answer >
Financial leverage is important because it allows a company to maximize the profits earned by shareholders as compared to profits earned from equity operations. Companies that demonstrate the ability to manage leverage by repaying debts on time increase their chances of getting loans at better interest rates.Full Answer >
About.com explains that a capital contribution in accounting is a segment of a company's recorded equity. The amount may be contributed using cash, equipment or other fixed assets. A common way for an owner to contribute capital to a company is to buy stocks.Full Answer >