If the amount assigned to ending inventory is incorrect,
A) The balance sheet is affected, but the income statement is not.
B) The income statement is affected, but the balance sheet is not.
C) The balance sheet is affected, but cost of goods sold is not.
D) Both the balance sheet and the income statement are affected.

Question

Quizplus · Accepted Answer

An incorrect amount assigned to ending inventory affects both the balance sheet and the income statement. The balance sheet is affected because ending inventory is a component of inventory, which is a current asset. If the ending inventory is overstated, then the total inventory is overstated, which affects the overall assets on the balance sheet. If the ending inventory is understated, then the total inventory is understated, which affects the overall assets on the balance sheet. The income statement is affected because ending inventory is used in the calculation of cost of goods sold. If the ending inventory is overstated, then cost of goods sold is understated and therefore, net income is overstated. If the ending inventory is understated, then cost of goods sold is overstated and therefore, net income is understated.

If the Amount Assigned to Ending Inventory Is Incorrect