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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Ignoring taxes, if a company understates its ending inventory by $10,000 in the current year:

a. assets for the current year will be overstated by $10,000.

b. net income for the subsequent year will be overstated by $10,000.

c. cost of goods sold for the current year will be understated by $10,000.

d. retained earnings for the current year will be unaffected.

To determine

Concept introduction:

Lower of Cost or market value method is applied to find the cost of ending inventory to be recorded in the book of account. According to this method the cost is compared with the market value and inventory is recorded with the lower amount of cost or market value.

To choose:

The correct statement showing the effect of understatement of inventory by $10,000, ignoring the taxes.

Explanation

Explanation for Correct answer:

b. If the inventory for current year is understated by $10,000, then the Net income for the subsequent year will be overstated by $10,000

Hence it is the correct answer.

Explanation for incorrect answers:

a. If the inventory for current year is understated by $10,000, the assets for the current years shall be understated...

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