During the taking of its physical inventory on December 31, 2010, Barry's Bike Shop incorrectly counted its inventory as $270,000 instead of the correct amount of $190,000. The effect on the balance sheet and income statement would be as follows:
A) assets overstated by $80,000; retained earnings understated by $80,000; net income statement understated by $80,000.
B) assets overstated by $80,000; retained earnings understated by $80,000; no effect on the income statement.
C) assets and retained earnings overstated by $80,000; net income overstated by $80,000.
D) assets and retained earnings overstated by $80,000; net income understated by $80,000.

Question

Quizplus · Accepted Answer

Since the inventory was overstated by $80,000, the assets and retained earnings were overstated by the same amount. This error did not affect the income statement since it happened after the end of the fiscal year. If the error had occurred during the fiscal year, it would have affected the cost of goods sold and net income. Therefore, the inventory adjustment would result in assets and retained earnings overstated by $80,000 and net income overstated by $80,000.

During the Taking of Its Physical Inventory on December 31