Question

If the beginning inventory is overstated:

1.the current ratio is overstated.

2.cost of goods sold is understated

3.retained earnings is understated.

4.working capital is understated.

Wavy Inc. is a calendar-year corporation. Its financial statements for the years 2017 and 2016 contained errors as follows:

	2017	2016
Ending Inventory	$9,000 overstated	$18,000 overstated
Depreciation Expense	$6,000 understated	$13,500 overstated

Assume that the proper correcting entries were made at December 31, 2016. By how much will 2017 income before taxes be overstated or understated?

$3,000 understated

$7,500 overstated

$10,500 overstated

$15,000 overstated

A new layer is formed under dollar-value LIFO when the ending inventory at:

end-of-year prices exceeds the beginning inventory at end-of-year prices.

end-of-year prices exceeds the beginning inventory at base-year prices.

base-year prices exceeds the beginning inventory at base-year prices.

current cost exceeds the beginning inventory at base-year cost.

Alexander Company had January 1 inventory of $150,000 when it adopted dollar-value LIFO. During the year, purchases were $900,000 and sales were $1,500,000. December 31 inventory at year-end prices was $189,750, and the price index was 110. What is Alexander Company’s gross profit?

$600,000.

$624,750.

$550,250.

$450,000.

Answer 1

Answer to first question in the list: Option-(3): retained earnings is understated. Reason: Cost of goods sold is calculated by adding current period's purchases with beginning inventory and subtracting the ending inventory for the reporting period. When beginning inventory is overstated, it will overstate cost of goods sold and as a result, firm's net income will be understated. When net income is understated, it will understate the retained earnings also because retained earnings is nothing but the accumulated net income of the firm that are not distributed as dividends. So, option-(3) is the correct answer.