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Viktor [21]
3 years ago
12

2014 ending inventory was overstated by $25,000, but it was too late to correct the financial statements. Which of the following

describes the effect of the inventory error on the 2014 financial statements?A. Net income and stockholders' equity are both understated.
B. Net income is understated and stockholders' equity is correct.
C. Net income and stockholders' equity are both overstated.
D. Net income and stockholders' equity are both unaffected.
Business
1 answer:
expeople1 [14]3 years ago
4 0

Answer:

C. Net income and stockholders' equity are both overstated.

Explanation:

In the income statement , ending inventory is deducted from the addition of the beginning inventory and net purchases to arrive at the cost of goods sold. Therefore, the cost of goods can be stated as an equation stated as follows:

Cost of goods sold = Beginning inventory + Net purchases - Ending inventory

From the above equation, it can be observed that if the ending inventory is overstated, cost of goods sold will be understated by that amount.

Since gross income is determined by deducting cost of goods sold from the net sales, an understated cost of goods sold will result in an overstated gross income and subsequently overstated net income.

Since net income is one of the components of the stockholders' equity, an overstated net income will leads to an overstated stockholders' equity.

Therefore, the correct option is C. Net income and stockholders' equity are both overstated.

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What is the full form of BIPPA​
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2 years ago
Two months ago, Air-tite Corporation purchased 5,500 pounds of Hydrol, paying $18,700. The demand for this product has been very
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A, B.  

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3 years ago
You think that in 15 years it will cost $214,000 to provide your child with a 4-year collge education. Will you have enough if y
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You will not have enough.

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