During the taking of its physical inventory on December 31, Barry's Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be
A) assets overstated by $70,000; retained earnings understated by $70,000; and net income statement understated by $70,000
B) assets overstated by $70,000; retained earnings understated by $70,000; and no effect on the income statement
C) assets, retained earnings, and net income all overstated by $70,000
D) assets and retained earnings overstated by $70,000 and net income understated by $70,000

Question

Quizplus · Accepted Answer

Overstating inventory by $70,000 would increase assets by the same amount. Since ending inventory is overstated, the cost of goods sold would be understated, leading to an overstatement of net income. This, in turn, would cause retained earnings to be overstated by $70,000, as they are directly affected by the net income figure.

During the Taking of Its Physical Inventory on December 31