Merchandise inventory at the end of the year is overstated. Which of the following statements correctly states the effect of the error?
A) owner's equity is overstated
B) cost of merchandise sold is overstated
C) gross profit is understated
D) net income is understated

Question

Quizplus · Accepted Answer

When merchandise inventory is overstated, it results in a lower cost of goods sold, which increases gross profit and net income, thus overstating owner's equity.

Merchandise Inventory at the End of the Year Is Overstated