If a Company Understates Its Ending Balance of Inventory in Year

question 79

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:

Ions

Atoms or molecules with a net electric charge due to the loss or gain of one or more electrons.

Molecules

The smallest unit of a chemical compound that can retain the chemical properties of the compound, consisting of one or more atoms bonded together.

First Law of Thermodynamics

This principle states that energy cannot be created or destroyed, only transformed from one form to another, implying that the total energy in an isolated system remains constant.

Concentrated Energy

Energy that is intensified or focused within a small area or volume, often for the purpose of efficient transmission or usage.