Inventory items purchased on credit that are correctly debited to 2013 purchases, but improperly included in the 2013 ending inventory cause:
A) 2013 assets to be understated and 2013 pre-tax income to be overstated.
B) both 2013 pre-tax income and 2013 assets to be understated.
C) both 2013 assets and pre-tax income to be overstated.
D) both accounts payable for 2013 and 2013 pre-tax income to be overstated.

Question

Quizplus · Accepted Answer

When inventory items are improperly included in the ending inventory, it means that the cost of goods sold (COGS) is understated because the ending inventory is overstated. This leads to an overstatement of pre-tax income because COGS is deducted from revenue to calculate income. Additionally, because the ending inventory is part of current assets, assets are also overstated.

Inventory Items Purchased on Credit That Are Correctly Debited to 2013