What effect would the below inventory scenario have on an income statement?

Question

Inventory on original balance sheet was $500,000. When company sold, inventory was found to be only $400,000. What happens to income statement?

increase income $100,000?

decrease income $100,000?

increase income of $50,000?

or no effect at all?

Help!

Answer 1

The entry to adjust the inaccurate inventory would be

Debit 'Cost of Goods Sold' $100,000

Credit 'Inventory' $100,000

This has the effect of increasing expenses by $100,000 which leads to a decrease in income of $100,000.