At the end of 2016, a $5,000 understatement was discovered in the amount of the 2016 ending inventory as reflected in the inventory records. What were the 2016 effects of the $5,000 inventory error (before correction)?
A)Assets were understated by $5,000 and pretax income was understated by $5,000.
B)Assets were understated by $5,000 and pretax income was overstated by $5,000.
C)Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000.
D)Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.

Question

Quizplus · Accepted Answer

The understatement of ending inventory by $5,000 means that assets (inventory) were understated by $5,000. This also means that the cost of goods sold was overstated by $5,000, leading to an understatement of pretax income by $5,000.

At the End of 2016, a $5,000 Understatement Was Discovered