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

Question

Quizplus · Accepted Answer

If the acquisition of merchandise and its attendant liability were not recorded, the company would have overstated its ending inventory and COGS (Cost of Goods Sold), which would lead to an overstatement of net income and owners' equity. However, the liability should have been recorded, which would mean that the liabilities are understated. Therefore, choice C is the best answer. The assets are not affected since the merchandise was included in the physical count, which means it is part of the ending inventory.

A Company Failed to Record an Acquisition of Merchandise and Its