Inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and stockholders' equity?

A) net income is overstated, assets are overstated, and stockholders' equity is understated
B) net income is overstated, assets are overstated, and stockholders' equity is overstated
C) net income is understated, assets are understated, and stockholders' equity is understated
D) net income is understated, assets are understated, and stockholders' equity is overstated

Question

Charlotte Coman · Accepted Answer

Final Answer : B, Explanation :  Overstating ending inventory results in lower cost of goods sold, which in turn overstates net income. This overstatement of net income increases retained earnings, thus overstating stockholders' equity. Assets are also overstated due to the higher inventory balance.

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