Langley Company received merchandise on December 31, 2016. Langley failed to record the purchase on account because the invoice was inadvertently destroyed. The merchandise was, however, included in ending inventory. What would be the effect of this event on the financial statements as of December 31, 2016?
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

Liabilities would be understated because the purchase on account (a liability) was not recorded. Retained earnings would be overstated because the cost of goods sold would be understated (since the purchase was not recorded), leading to higher net income and thus higher retained earnings.

Langley Company Received Merchandise on December 31, 2016