The Effect of an Error Resulting in an Understatement of Ending

question 42

Multiple Choice

The effect of an error resulting in an understatement of ending inventory is to:

• A)overstate the next period's beginning inventory.
• B)understate cost of goods sold of the current period.
• C)overstate cost of goods sold of the current period.
• D)overstate operating expenses of the current period.

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Definitions:

Signaling Effect

The signaling effect refers to the idea that actions by a company can provide information to investors about its future prospects.

Dividend Increase

An action by a company to raise the amount of money paid to its shareholders as dividends.

Residual Dividend Theory

A policy where dividends are based on earnings left over after all operating and expansion expenses are covered.

Capital Budgeting

The process of planning and evaluating expenditures on assets whose returns are expected to extend beyond one year.