Home › ACCA › Financial Accounting › Inventory Valuation › A company overstates its ending Merchandise Inve…
A company overstates its ending Merchandise Inventory. What is the combined effect on total assets and on stockholders' equity at period end?
ABoth total assets and equity are understated
BBoth total assets and equity are overstated
CTotal assets overstated; equity understated
DTotal assets understated; equity overstated
Answer & Solution
Correct answer: B. Both total assets and equity are overstated
1. Inventory is an asset, so overstating it overstates total assets.
2. Overstated inventory lowers cost of sales, raising net income.
3. Higher net income raises retained earnings and total stockholders' equity.
4. Therefore both assets and equity are overstated; rule out option A, which describes understatement.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.1.4 "Physical Inventory Count", p.126_
Related questions
Correct ending inventory is $20,000, but a missed item causes only $19,500 to be reported.If a company understates its ending Merchandise Inventory in the physical count, what is tGoods a company has sold are in transit on a carrier under shipping terms of FOB destinatiWhen a physical inventory count is taken, which item should be EXCLUDED from a company's cUnder IFRS, the comparison used to write inventory down when its value falls below cost isA company holds 200 units of a phone bought at $100 each whose current value has fallen toA company values inventory at lower of cost and net realisable value across four commoditiCommodity D has 40 units at a unit cost of $3 and a unit net realisable value of $4. Apply