Assume that ending inventory in fiscal 2012 is overstated by $1,000.What impact will this have on fiscal 2012 financial reporting?
A)Retained earnings is overstated by $1,000.
B)No effect on inventory value on the balance sheet.
C)No effect on retained earnings.
D)Inventory is understated on the balance sheet.

Question

Quizplus · Accepted Answer

Ending inventory is reported on the balance sheet, so an overstatement of $1,000 would cause assets to be overstated by $1,000. This would also cause retained earnings to be overstated by the same amount, as net income would have been inflated by $1,000 due to the overstatement of ending inventory. Therefore, choice A is correct. Choice B is incorrect because an overstatement of ending inventory would affect the inventory value reported on the balance sheet. Choice C is incorrect for the same reason as choice A. Choice D is incorrect because an overstatement of ending inventory would cause inventory to be overstated on the balance sheet, not understated.

Assume That Ending Inventory in Fiscal 2012 Is Overstated by $1,000.What