At the end of 2014, a $5,000 understatement was discovered in the amount of the 2014 ending inventory as reflected in the inventory records. What were the 2014 effects of the $5,000 inventory error (before correction)?
A) Assets were understated by $5,000 and pretax income was understated by $5,000.
B) Assets were understated by $5,000 and pretax income was overstated by $5,000.
C)Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000.
D)Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.

Question

Quizplus · Accepted Answer

The ending inventory is part of the assets, so an understatement in inventory leads to an understatement in assets. Additionally, ending inventory is subtracted in the calculation of cost of goods sold (COGS), so an understatement in inventory results in an overstatement of COGS, which in turn causes pretax income to be understated.

At the End of 2014, a $5,000 Understatement Was Discovered