The sales manager of Sebastian Company failed to record a valid sale on account of merchandise that had been shipped to a customer prior to the end of the current year; however, the company uses a periodic method of accounting for inventory and the merchandise had been properly excluded from inventory at the end of the current year.As a result of this error, Sebastian Company's
A)total assets are overstated for the current year.
B)total expenses are understated for the current year.
C)net income is overstated for the current year.
D)total assets are understated at the end of the current year.
E)none of the above.

Question

Quizplus · Accepted Answer

Under the periodic inventory system, the cost of goods sold is determined at the end of the accounting period, and the inventory is adjusted accordingly. Since the sale was not recorded, the revenue from the sale would not be included in the financial statements, but the inventory was correctly removed. This means that the company's assets (specifically, accounts receivable) are understated because the sale that should have increased accounts receivable was not recorded. The inventory adjustment does not impact this conclusion because the merchandise was properly excluded from inventory.

The Sales Manager of Sebastian Company Failed to Record a Valid