If a Company Understates Its Ending Inventory Balance for 2016

question 18

Short Answer

If a company understates its ending inventory balance for 2016 by $15,500, what are the effects on its net income for 2017 and 2016? ​ $\begin{array}{cc}\text { Effect on } 2017 \text { Net Income } & \text { Effect on } 2016 \text { Net Income } \\\hline \text { a. Overstated by } \$ 15,500 & \text { Understated by } \$ 15,500 \\\text { b. Understated by } \$ 15,500 & \text { Overstated by } \$ 15,500 \\\text { c. Understated by } \$ 15,500 & \text { No effect } \\\text { d. Overstated by } \$ 15,500 & \text { No effect }\end{array}$

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Definitions:

Net Receivables

the total amount of money owed to a company by its customers minus any amounts that are expected to be uncollectible.

Current Liabilities

Short-term financial obligations that are due within one year or within the normal operating cycle of the business, whichever is longer.

Acid-Test Ratio

A liquidity ratio that measures a company's ability to pay off its current liabilities with its most liquid assets, excluding inventory.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations with its current assets.