During the Taking of Its Physical Inventory on December 31

question 78

Multiple Choice

During the taking of its physical inventory on December 31, 2014, Barry's Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be as follows:

• A) assets overstated by $70,000;retained earnings understated by $70,000; net income statement understated by $70,000.
• B) assets overstated by $70,000;retained earnings understated by $70,000; no effect on the income statement.
• C) assets and retained earnings overstated by $70,000; net income overstated by $70,000.
• D) assets and retained earnings overstated by $70,000; net income understated by $70,000.

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Definitions:

Gain

Gain refers to an increase in economic benefits or inflow of assets that result in an increase in equity, not related to contributions from equity participants.

Office Equipment

Assets like computers, desks, and chairs used in an office to carry out operations, not immediately consumed in the production process.

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life.

Prepaid Expenses

Expenses paid in advance for goods or services to be received in the future.