Effect of Errors in Physical Inventory Missouri River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y2, Missouri River Supply incorrectly counted its inventory as $770,080 instead of the correct amount of $793,180. Enter all amounts as positive numbers. a. State the effect of the error on the December 31, 20Y2, balance sheet of Missouri River Supply. Balance Sheet Items Understated/Overstated Amount Merchandise Inventory Understated $ Current Assets Understated $ Total Assets Understated $ Owner's Equity Understated $ b. State the effect of the error on the income statement of Missouri River Supply for the year ended December 31, 20Y2. Income Statement Items Overstated/Understated Amount Cost of Merchandise Sold Overstated $ Gross Profit Understated $ Net Income Understated $ c. If uncorrected, what would be the effect of the error on the 20Y3 income statement? Income Statement Items Overstated / Understated Amount Cost of Merchandise Sold Understated $ Gross Profit Overstated $ Net Income Overstated $ d. If uncorrected, what would be the effect of the error on the December 31, 20Y3, balance sheet? The December 31, 20Y3, balance sheet would be correct, since the 20Y2 inventory error reverses itself in 20Y3. The December 31, 20Y3, balance sheet would be incorrect, since the 20Y2 inventory error overstates the beginning inventory in20Y3. The December 31, 20Y3, balance sheet would be incorrect, since the 20Y2 inventory error understates the beginning inventory in 20Y3. 1 Feedback a. When the ending inventory is understated, consider how this understatement affects both current and total assets on the balance sheet. If ending inventory is understated, items reported as sold (or cost of merchandise sold) will be overstated. Since cost of merchandise sold is an expense, what is the impact of an overstated expense on gross profit and net income on the income statement and on owner's equity in the balance sheet? The balance sheet would be automatically correct the following year, if the error is not corrected. b, c. When the ending inventory is understated, consider how this understatement affects both current and total assets on the balance sheet. If ending inventory is understated, items reported as sold (or cost of merchandise sold) will be overstated. Since cost of merchandise sold is an expense, what is the impact of an overstated expense on gross profit and net income on the income statement and on owner's equity in the balance sheet? An incorrect ending inventory in one year becomes an incorrect beginning inventory the next year.