The December 31, 2010, ending inventory failed to include $10, 000 of inventory that was received on December 27, 2010.The purchase on account was, however, properly recorded on the date of delivery.What effect will this error have on the December 31, 2010, assets, liabilities, and net income for the year then ended? $\begin{array}{llll}
& \text { Assets}& \text { Liabilities}& \text { Net Income}\
\text { I. } & \text { overstated } & \text { overstated } & \text { no effect } \
\text { II. } & \text { understated } & \text { understated } & \text { no effect } \
\text { III. } & \text { understated } & \text { no effect } & \text { understated } \
\text { IV } & \text { understated } & \text { inderstated } & \text { inderstate }
\end{array}$

A)I
B)II
C)III
D)IV

Question

The December 31, 2010, ending inventory failed to include $10, 000 of inventory that was received on December 27, 2010.The purchase on account was, however, properly recorded on the date of delivery.What effect will this error have on the December 31, 2010, assets, liabilities, and net income for the year then ended? $\begin{array}{llll}
 & \text { Assets}& \text { Liabilities}& \text { Net Income}\
\text { I. } & \text { overstated } & \text { overstated } & \text { no effect } \
\text { II. } & \text { understated } & \text { understated } & \text { no effect } \
\text { III. } & \text { understated } & \text { no effect } & \text { understated } \
\text { IV } & \text { understated } & \text { inderstated } & \text { inderstate }
\end{array}$

A)I
B)II
C)III
D)IV

Quizplus · Accepted Answer

Failing to include $10,000 of inventory in the ending inventory understates assets because the inventory is an asset that was not counted. Liabilities are not affected because the purchase was recorded on the date of delivery. Net income is understated because the cost of goods sold would be overstated (since ending inventory is understated), leading to a lower net income.

The December 31, 2010, Ending Inventory Failed to Include $10