Merchandise Inventory at the End of the Year Was Inadvertently

question 165

Multiple Choice

Merchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and owner's equity?

• A) net income is overstated, assets are overstated, owner's equity is understated
• B) net income is overstated, assets are overstated, owner's equity is overstated
• C) net income is understated, assets are understated, owner's equity is understated
• D) net income is understated, assets are understated, owner's equity is overstated

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Definitions:

Depreciates

Depreciates refers to the reduction in the value of an asset over time due to wear and tear, age, or obsolescence, typically reflected in accounting as a method to allocate the cost of an asset over its useful life.

Forward Contract

A customized contract between two parties to buy or sell an asset at a specified future date at a price agreed upon today.

Forward Rate

An agreed-upon exchange rate for a currency to be exchanged on a specified future date, used in forward contracts.

Discount Rate

A interest rate used to determine the present value of future cash flows.