If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect its bottom line?
A) There will be no change to net income.
B) Net income will be overstated.
C) Net income will be understated.
D) Only gross profit will be affected.

Question

Quizplus · Accepted Answer

If a company mistakenly counts more items than actually exist, the value of inventory on the balance sheet will be overstated, leading to an overstatement of net income. This is because the cost of goods sold will be lower (due to the overstated inventory valuation) and therefore gross profit will be higher, resulting in a higher net income.

If a Company Mistakenly Counts More Items During a Physical