Fred received merchandise on consignment from Dino. As at January 31, Fred included the goods in inventory, but did NOT record the transaction. The effect of this on Fred's financial statements for January 31 would be
A) net income, current assets, and retained earnings were understated.
B) net income was correct and current assets were understated.
C) net income, current assets, and retained earnings were overstated.
D) net income and current assets were overstated and current liabilities were understated.

Question

Quizplus · Accepted Answer

Since Fred did not record the receipt of goods on consignment from Dino, both inventory and accounts payable will be understated. As a result, cost of goods sold will be understated or net income will be overstated. Therefore, net income and retained earnings will be overstated. Since inventory is understated, current assets will be understated as well. Consequently, net income, current assets, and retained earnings are overstated.

Fred Received Merchandise on Consignment from Dino