Fred received merchandise on consignment from Barney.As of March 31, Fred had recorded the transaction as a purchase and included the goods in inventory.The effect of this on Fred's financial statements for March 31 would be
A)net income was correct and current assets and current liabilities were overstated.
B)net income, current assets, and current liabilities were overstated.
C)net income and current liabilities were overstated.
D)no effect.

Question

Quizplus · Accepted Answer

Fred recorded the consignment as a purchase, which means he recognized the goods as his own and included them in inventory. However, since the goods are on consignment, Fred does not own them and should not have included them in inventory. This overstates current assets. Additionally, Fred would have recognized the cost of goods sold associated with the consignment goods, which would overstate net income. Current liabilities would also be overstated because Fred would have recorded a liability to Barney for the goods.

Fred Received Merchandise on Consignment from Barney