Merchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and owner's equity?
A) net income is overstated, assets are overstated, owner's equity is understated
B) net income is overstated, assets are overstated, owner's equity is overstated
C) net income is understated, assets are understated, owner's equity is understated
D) net income is understated, assets are understated, owner's equity is overstated

Question

Quizplus · Accepted Answer

When merchandise inventory is overstated, it results in a lower cost of goods sold, leading to an overstated net income. Since inventory is an asset, overstating it also overstates total assets. Owner's equity is also overstated because it includes retained earnings, which are affected by net income.

Merchandise Inventory at the End of the Year Was Inadvertently