Question

Kelton Inc. purchases inventory for $2,000 and incurs shipping costs of $100. To record this transaction, the company debits Inventory for $2,000, debits Selling Expenses for $100, and credits Cash for $2,100. Which of the following statements is correct?A. Revenues are understated.
B. Net income is overstated.
C. Assets are understated.
D. All accounts are accurately stated.

Answer 1

Answer:

C. Assets are understated

Explanation:

In terms of IAS 2, Inventory cost include, the purchase cost , conversion cost and all other costs directly related to bringing the inventory in the correct location and condition intended for sale by the company.

The Company has not included shipping costs of $100 to inventory cost, hence inventory is understated and consequently this overstates the cost of goods sold and understate the Inventory , gross profit and net income by $100

Selling Expenses have been accounted for in error, therefore Operating Expenses are Overstated and Net Income understated by $100