In the course of routine checking of all journal entries prior to preparing year-end reports, Betty Eller discovered several strange entries. She recalled that the presidents son Joe had come in to help out during an especially busy time and that he had recorded some journal entries. She was relieved that there were only a few of his entries, and even more relieved that he had included rather lengthy explanations. The entries Joe made were:

(1) Work in Process Inventory 25,000 Cash 25,000 (This is for materials put into process. I dont find the record that we paid for these, so Im crediting Cash because I know well have to pay for them sooner or later.)

(2) Manufacturing Overhead 12,000 Cash 12,000 (This is for bonuses paid to salespeople. I know theyre part of overhead, and I cant find an account called Non-Factory Overhead or Other Overhead so Im putting it in Manufacturing Overhead. I have the check stubs, so I know we paid these.)

(3) Wages Expense 120,000 Cash 120,000 (This is for the factory workers wages. I have a note that employer payroll taxes are $18,000. I still think thats part of wages expense and that well have to pay it all in cash sooner or later, so I credited Cash for the wages and the taxes.)

(4) Work in Process Inventory 3,000 Raw Materials Inventory 3,000 (This is for the glue used in the factory. I know we used this to make the products, even though we didnt use very much on any one of the products. I got it out of inventory, so I credited an inventory account.)

This is the question I need help with:

If the entry (4) was not corrected, which financial statements (income statement or balance sheet) would be affected? What balances would be overstated or understated?

This is the feedback I received:

4. Your response is not clear what accounts are affected on what financial statements and how. Please simplify your answer like the following:

Balance Sheet

Cash = Overstated

Inventory (raw materials) = Understated