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Kilian Company's inventory balance at the end of the current year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered, the effect of this error on financial statements in the following year will be: Multiple choice question. overstated net income the financial statement will be correct understated assets, retained earnings, and net income overstated assets, retained earnings and net income

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Answer: assets, retained earnings and net income understated

Explanation:

The assets will be understated because inventory is part of assets and if some inventory was not included, the inventory figure would be less than it should be meaning that assets are understated.

Closing inventory is deducted from Cost of Goods sold. If this inventory is not included in the income statement, the Cost of Goods sold would be larger than it should be and would therefore reduce the income more than it should have as it is an expense.

Net income would therefore be understated and this would translate to an understated retained earnings as retained earnings come from net income.

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