If a Company Understates Its Ending Balance of Inventory in Year

question 104

Multiple Choice

If a company understates its ending balance of inventory in year 1 and it records inventory correctly in year 2,which one of the following is true?

• A)Net income is overstated in year 1.
• B)Cost of goods sold is understated in year 2.
• C)Net income is understated in year 2.
• D)Retained earnings is understated in year 2.

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Definitions:

Accrual Basis

An accounting method where income and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged.

Accounting Records

The documentation of all the financial transactions and positions of a business, kept for the purpose of financial reporting and auditing.

Cash Basis

An accounting method where revenues and expenses are recognized only when cash is received or paid out.

Incurred Expenses

Costs that have been recognized or consumed in the operations of a business, regardless of the payment status.