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? Accounts Receivable was overstated. Profit was overstated Revenue was understated Inventories were understated O Retained Earnings was overstated Accounts Payable was understated. Submit Answer Tries 0/2

Explanation / Answer

the right answer is Option (f) Accounts payable was understated. When merchandise was purchased on credit, we have to Debit Merchandise account and We have to credit Accounts Payable Account. In this case, we are not recognising Accounts Payable as a Liability. Therefore, we have understated Accounts Payable.

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