Zinke Company understated its ending inventory at the end of Year 1.Which of the following correctly states the effect of the error on the amounts shown on the Year 1 financial statements?
A)Overstatement of total assets and cost of goods sold.
B)Overstatement of cost of goods sold and retained earnings.
C)Understatement of liabilities and retained earnings.
D)Understatement of total assets and gross margin.

Question

Quizplus · Accepted Answer

Understating inventory at the end of Year 1 understates assets (inventory)and stockholders' equity (retained earnings).It also overstates the cost of goods sold,which understates gross margin and net income for Year 1.

Zinke Company Understated Its Ending Inventory at the End of Year