A $25,000 Overstatement of the 2015 Ending Inventory Was Discovered

question 28

Multiple Choice

A $25,000 overstatement of the 2015 ending inventory was discovered after the financial statements for 2015 were prepared. Which of the following describes the effect of the inventory error on the 2016 financial statements?

• A)Net income and stockholders' equity are both understated.
• B)Net income is understated and stockholders' equity is correct.
• C)Net income and stockholders' equity are both overstated.
• D)Net income and stockholders' equity are both unaffecteD.The overstatement of the 2015 ending inventory causes the 2015 net income to be overstated and the 2016 net income to be understated.Stockholders' equity at the end of 2016 is correct because inventory errors are counter-balancing.

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Definitions:

Interpreting Standards

The practice of understanding and applying guidelines or criteria in a specific area, often to ensure consistency and quality.

Social Structure

The organized pattern of social relationships and social institutions that together compose society.

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The ability of a group of individuals to endure and sustain themselves through cooperation and shared resources.

Personal Satisfactions

The fulfillment or gratification of one's desires, expectations, or needs, or the pleasure derived from such fulfillment.