Merchandise inventory at the end of the year is overstated. Which of the following statements correctly states the effect of the error?
A) retained earnings is overstated
B) cost of merchandise sold is overstated
C) gross profit is understated
D) net income is understated

Question

Quizplus · Accepted Answer

When merchandise inventory is overstated, it results in a lower cost of goods sold, leading to a higher gross profit and net income. Consequently, retained earnings are also overstated.

Merchandise Inventory at the End of the Year Is Overstated