If a Company Understates Its Count of Ending Inventory in Year

question 27

Multiple Choice

If a company understates its count of ending inventory in Year 1,which of the following is true?

• A)Costs of good sold is understated at the end of Year 1.
• B)Profit is correct in Year 2.
• C)The balance of retained earnings is overstated at the end of Year 1.
• D)The balance of retained earnings is correct at the end of Year 2.

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Definitions:

Marginal Costs

The amount spent on producing an extra unit of a product or service.

Fixed Costs

Costs that do not vary with the level of output or sales in the short term, such as rent or salaries.

Sunk Costs

Costs that have already been incurred and cannot be recovered or refunded, and thus should not factor into future decision-making processes.

Fixed Costs

Fixed expenditures that are unaffected by changes in production or sales volumes, like rent, wages, and insurance costs.