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:

Efficiency

A measure of how well resources (time, energy, costs) are used to achieve a goal or perform a process with minimal waste or effort.

Break-Even Point

The point at which total cost and total revenue are equal, meaning there is no net loss or gain.

Variable Cost

A cost that varies with the level of output or production, such as materials and labor costs.

Break-Even Point

The level of production or sales at which total revenues equal total costs, resulting in no net loss or gain.