In inventorying goods at December 31, a company incorrectly included some items received on consignment. The error causes an:
A) understatement of inventory, purchases, and accounts payable.
B) overstatement of net income and assets by the same amount.
C) understatement of income and assets by the same amount.
D) overstatement of inventory, purchases, and accounts payable.

Question

Quizplus · Accepted Answer

Including items received on consignment (which should not be included in the company's inventory as they do not own these goods) leads to an overstatement of inventory. This overstatement of inventory results in a lower cost of goods sold, which in turn overstates net income. Since inventory is an asset, this also overstates the company's assets. The amounts by which net income and assets are overstated are the same, as the overstatement of inventory directly impacts both.

In Inventorying Goods at December 31, a Company Incorrectly Included