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 assets and owners' equity.
C) understate both assets and liabilities.
D) understate liabilities and overstate both net income and owners' equity.

Question

Quizplus · Accepted Answer

The failure to record the acquisition of merchandise and its liability would result in both an understatement of liabilities and an overstatement of net income and owners' equity, as the cost of the merchandise would not have been properly accounted for as an expense. However, since the merchandise was included in the physical count of ending inventory, there would be an overstatement of inventory and an overstatement of assets. Therefore, choice D is the best option as it correctly identifies the understatement of liabilities and the overstatements of net income, owners' equity, and assets.

A Company Failed to Record an Acquisition of Merchandise and Its