A $25,000 overstatement of the 2010 ending inventory was discovered after the financial statements for 2010 were prepared.Which of the following describes the effect of the inventory error on the 2011 financial statements?
A)Net income and stockholders' equity are both understated.
B)Net income is understated and stockholders' equity is not affected.
C)Net income and stockholders' equity are both overstated.
D)Net income and stockholders' equity are both unaffected.

Question

Quizplus · Accepted Answer

The overstatement of the 2010 ending inventory causes the 2010 net income to be overstated and the 2011 net income to be understated. Stockholders' equity at the end of 2011 is not affected because inventory errors are counter-balancing.

A $25,000 Overstatement of the 2010 Ending Inventory Was Discovered