Mark Company overstated the beginning inventory on January 1, 2014, by $20,000. No other errors were identified. If the error is not discovered, which of the following net income effects related to the inventory error are true?
A) I
B) II
C) III
D) IV

Question

Mark Company overstated the beginning inventory on January 1, 2014, by $20,000. No other errors were identified. If the error is not discovered, which of the following net income effects related to the inventory error are true? 
A) I 
B) II 
C) III 
D) IV

Quizplus · Accepted Answer

The net income for the period would be overstated by the amount of the inventory error, which is $20,000. Therefore, in the absence of further errors, the following net income effects related to the inventory error are true:
I. Cost of goods sold would be understated by $20,000.
II. Gross profit would be overstated by $20,000.
III. Total assets would be overstated by $20,000.
IV. Total equity would be overstated by $20,000.
However, only option B) correctly identifies the true effect on net income, which is an overstatement of $20,000.

Mark Company Overstated the Beginning Inventory on January 1, 2014