Ending Inventory for the Current Year Is Overstated by $20

question 61

Multiple Choice

Ending inventory for the current year is overstated by $20 000.What effect will this error have on the following year's Net profit?

• A)Net profit will be understated by $40 000.
• B)The inventory overstatement will not affect Net profit.
• C)Net profit will be understated by $20 000.
• D)Net profit will be overstated by $20 000.

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Definitions:

Owner's Equity

The total value that would accrue to a business's owners after all liabilities are subtracted from all assets; also known as shareholder's equity or net worth.

Liabilities

Economic debts or obligations a company is responsible for, which are to be paid off over time through the exchange of economic advantages.

Owner's Withdrawal

Amounts of cash or other assets that the owner takes from the company for personal use.

Cash Account

An account that records all transactions involving cash inflows and outflows within a company.