The December 31, 2016, ending inventory failed to include $25,000 of inventory that was received on December 27,
2016. The purchase on account was, however, properly recorded on the date of delivery. What effect will this error have on the December 31, 2016, assets, liabilities, and net income for the year then ended? $$\begin{array} { l l l l }
& \text { Assets } & \text { Liabilities } & \text { NetIncome } \\hline
\text { I. } & \text { overstated } & \text { overstated } & \text { no effect II. } \
& \text { understated } & \text { understated } & \text { no effect } \
\text { III. } & \text { understated } & \text { no effect } & \text { understated } \
\text { IV } & \text { understated } & \text { understated } & \text { understated }
\end{array}$$
A) I
B) II
C) III
D) IV

Question

The December 31, 2016, ending inventory failed to include $25,000 of inventory that was received on December 27,
2016. The purchase on account was, however, properly recorded on the date of delivery. What effect will this error have on the December 31, 2016, assets, liabilities, and net income for the year then ended? $$\begin{array} { l l l l } 
& \text { Assets } & \text { Liabilities } & \text { NetIncome } \\hline
\text { I. } & \text { overstated } & \text { overstated } & \text { no effect II. } \
& \text { understated } & \text { understated } & \text { no effect } \
\text { III. } & \text { understated } & \text { no effect } & \text { understated } \
\text { IV } & \text { understated } & \text { understated } & \text { understated }
\end{array}$$
A) I
B) II
C) III
D) IV

Quizplus · Accepted Answer

The inventory omission means assets (inventory) are understated because the $25,000 of inventory was not included. Liabilities are not affected because the purchase was properly recorded on the date of delivery. Net income is understated because the cost of goods sold is understated (less inventory was counted, reducing COGS), which would otherwise increase net income if corrected.

The December 31, 2016, Ending Inventory Failed to Include $25,000