Inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and stockholders' equity?
A) net income is overstated, assets are overstated, and stockholders' equity is understated
B) net income is overstated, assets are overstated, and stockholders' equity is overstated
C) net income is understated, assets are understated, and stockholders' equity is understated
D) net income is understated, assets are understated, and stockholders' equity is overstated

Question

Quizplus · Accepted Answer

When inventory is overstated at the end of the year, the cost of goods sold will be understated, leading to an overstatement of net income. This overstatement of net income increases retained earnings, part of stockholders' equity, thus overstating it as well. Assets are overstated because the inventory is a component of current assets.

Inventory at the End of the Year Was Inadvertently Overstated