Laura Company received merchandise on December 31, 2010.Laura failed to record the purchase on account because the invoice was inadvertently destroyed.The merchandise was, however, included in ending inventory.The effect of this event on the financial statements as of December 31, 2010, would be
A)assets and liabilities would be understated
B)assets and owners' equity would be overstated
C)liabilities would be understated and retained earnings overstated
D)liabilities would be overstated and retained earnings understated

Question

Quizplus · Accepted Answer

Since the purchase was not recorded, neither the accounts payable nor the cost of the merchandise would be reflected in the financial statements, which would result in an understatement of liabilities. However, including the merchandise in ending inventory would overstate retained earnings, as the cost of the merchandise would be included in the cost of goods sold when the merchandise is eventually sold. Therefore, both liabilities and retained earnings would be affected.

Laura Company Received Merchandise on December 31, 2010