If a company misclassifies a general,selling and administrative cost as a product cost in a period when production exceeds sales:
A) net income will be overstated.
B) total assets will be understated.
C) gross margin will be understated.
D) both net income will be overstated and gross margin will be understated

Question

Quizplus · Accepted Answer

Misclassifying a general, selling, and administrative cost as a product cost will increase the cost of goods sold and decrease gross margin, resulting in an understated gross margin. However, since the cost is incorrectly classified as a product cost, it will also be included in the inventory cost, which will overstate net income. Therefore, both net income will be overstated and gross margin will be understated. Total assets will not be affected by this misclassification.

If a Company Misclassifies a General,selling and Administrative Cost as a Product