During the taking of its physical inventory on December 31, 2014, Barry's Bike Shop incorrectly counted its inventory as $216,400 instead of the correct amount of $170,399. The effect on the balance sheet and income statement would be

Asset and retained earnings overstated by $46,001

Net income overstated by $46,001

Explanation:

Given the data below;

Correct amount of inventory = $170,399

Inventory incorrectly recorded = $216,400

Inventory over stated by = $216,400 - $170,399

= $46,001

Because the ending inventory is overstated, the net income would also be overstated by $46,001

In the balance sheet, the retained earnings would be overstated by $46,001 as a result of the overstated net income.

We know that ending inventory forms part of the current asset in the balance sheet, hence current asset would be overstated by $46,001 due to the over stated ending inventory.

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