The financial statements of Mannassass Corporation for 2014 and 2015 contained the following errors:

Assuming that none of the errors were detected or corrected,by what amount will 2014 operating income be overstated or understated?
A)$9,200 overstated
B)$9,200 understated
C)$18,800 understated
D)$18,800 overstated

Question

The financial statements of Mannassass Corporation for 2014 and 2015 contained the following errors:

Assuming that none of the errors were detected or corrected,by what amount will 2014 operating income be overstated or understated?
A)$9,200 overstated 
B)$9,200 understated 
C)$18,800 understated 
D)$18,800 overstated

Quizplus · Accepted Answer

The error in 2014 balance sheet of overstating inventory by $9,200 will cause the cost of goods sold to be understated by $9,200. Since operating income is calculated as revenue minus cost of goods sold, the operating income for 2014 will be overstated by $9,200. In 2015, the error in understating depreciation expense by $9,200 will cause net income to be overstated by $9,200. However, the question only asks about the impact on 2014 operating income, so the answer is D, $18,800 overstated, which is the sum of the two errors.

The Financial Statements of Mannassass Corporation for 2014 and 2015