X Company is a merchandiser and prepares monthly financial statements. On May 14

Question

X Company is a merchandiser and prepares monthly financial statements. On May 14, X Company purchased merchandise from a supplier on account, and its accountant recorded the transaction as an increase in Inventories and a decrease in Retained Earnings. What was the effect of this incorrect entry on the May 31 financial statements?

A. Profit was overstated.
B. Revenue was understated.
C. Accounts Receivable was overstated.
D. Accounts Payable was understated.
E. Inventories were understated.
F. Retained Earnings was overstated.

Explanation / Answer

Entry for Merchandise purchased on account

Merchandise a/c          Dr.

          To Accounts Payable

Effect of Incorrect entry : D. Accounts Payable was understated.

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