A company failed to record an acquisition of merchandise and its related liability, but the merchandise was included in ending inventory. The effect on the financial statements was to:
A) understate both assets and liabilities.
B) understate net income and owners' equity.
C) understate assets and owners' equity.
D) understate liabilities, and overstate both net income and owners' equity.

Question

Quizplus · Accepted Answer

The failure to record the liability understates liabilities. Since the merchandise is included in ending inventory, assets are not understated. However, because the expense related to the acquisition is not recorded, net income and owners' equity are overstated.

A Company Failed to Record an Acquisition of Merchandise and Its