If a company misclassifies a general,selling and administrative cost as a product cost in a period when production exceeds sales:
A) net income will be overstated.
B) total assets will be understated.
C) gross margin will be understated.
D) Both net income will be overstated and gross margin will be understated.

Question

Quizplus · Accepted Answer

Classifying administrative salaries as a product cost (rather than a period cost)means that these costs are first accumulated in the Inventory account and then expensed when the goods are sold.Production exceeded sales;as such,inventory increased during the period and some of the administrative salaries have passed through the Inventory account into the Cost of Goods Sold account with the rest remaining in the Inventory account.As a result,the gross margin will be understated.In addition,net income would be overstated because the understated expense would exceed the overstatement of cost of goods sold.

If a Company Misclassifies a General,selling and Administrative Cost as a Product