Feine Co. accepted delivery of merchandise which it purchased on account. As of December 31, Feine had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be
A) net income, current assets, and retained earnings were understated.
B) net income was correct and current assets were understated.
C) net income was understated and current liabilities were overstated.
D) net income was overstated and current assets were understated.

Question

Quizplus · Accepted Answer

By not including the purchased merchandise in its inventory, Feine Co. would have understated its current assets (because inventory is a current asset). This also means that the cost of goods sold (COGS) would be understated, leading to an overstatement of net income. Since retained earnings is affected by net income, it would also be understated.

Feine Co Accepted Delivery of Merchandise Which It Purchased on Account