During the taking of its physical inventory on December 31, 2014, Barry's Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be as follows:
A) assets overstated by $70,000;retained earnings understated by $70,000; net income statement understated by $70,000.
B) assets overstated by $70,000;retained earnings understated by $70,000; no effect on the income statement.
C) assets and retained earnings overstated by $70,000; net income overstated by $70,000.
D) assets and retained earnings overstated by $70,000; net income understated by $70,000.

Question

Quizplus · Accepted Answer

The incorrect counting of inventory has resulted in an overstatement of assets by $70,000 (350,000-280,000). Since the error was not caught and corrected, the balance sheet would show an overstated value of assets, and therefore, the retained earnings would also be overstated by $70,000 as it represents the difference between total assets and total liabilities. However, the net income would be overstated by $70,000 since the cost of goods sold will be understated by that amount. Therefore, the correct answer is C.

During the Taking of Its Physical Inventory on December 31