An understatement of ending inventory will cause
A) An overstatement of assets and an understatement of equity on the balance sheet.
B) An understatement of assets and an overstatement of equity on the balance sheet.
C) An overstatement of assets and equity on the balance sheet.
D) An understatement of assets and equity on the balance sheet.
E) No effect on the balance sheet.

Question

Quizplus · Accepted Answer

Ending inventory is an asset, and an understatement of it would lead to a lower value of total assets. As equity is calculated as the difference between assets and liabilities, an understatement of assets will result in an understatement of equity as well. Therefore, an understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.

An Understatement of Ending Inventory Will Cause