Green Co. received merchandise on consignment. As of January 31, Green included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be
A) net income, current assets, and retained earnings were overstated.
B) net income was correct and current assets were understated.
C) net income and current assets were overstated and current liabilities were understated.
D) net income, current assets, and retained earnings were understated.

Question

Quizplus · Accepted Answer

Including consigned goods in inventory without recording the transaction overstates inventory (a current asset), which in turn overstates net income (due to lower cost of goods sold) and retained earnings (as net income contributes to retained earnings).

Green Co Received Merchandise on Consignment