during the taking of a physical inventory on Dec 31, inventory was counted as $1

Question

during the taking of a physical inventory on Dec 31, inventory was counted as $100,780 instead of the correct amount of $100.870. The effec of the error of the December 31 balance sheet and income statement will be

a. retained earning will be understated:gross profit will be overstated.
b. merchandise inventory will be overstated; cost of merchandise sold will be overstated.
c. total assets will be overstated; net income will be understated.
d. retained earning will be understated; cost of merchandise sold will be overstated.

Explanation / Answer

Here the inventory is counted by $90 more ($100,870 - $100,780); because of this the Gross profit and Net Profit will decrease. If the Net profit is decerase then the retained earnings are also decreased. Hence the right option is (d). Retained earnings will be understated; cost of merchandise sold will be overstated. Cost of Merchandise Sold = Opening Stock + Purchases - Closing Stock d. retained earning will be understated; cost of merchandise sold will be overstated.

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