Question

10. Dandy Dan's Variety Store had an error in its December 31, 20x4, balance sheet. The ending inventory was listed at a value of $40,000 instead of $38,000. Assuming that there are no other errors, which of the following is a true statement concerning the following year's financial statements prepared on December 31, 20xs? A. The cost of goods sold for the year will be overstated. B. The ending inventory on the balance sheet will be overstated. C. The net income for the year will be overstated. D. The beginning inventory on the balance sheet will be understated. t which of the following items

Answer 1

Answer:

Correct answer is:

A. The cost of goods sold for the year will be overstated

Explanation:

Year 2004:

The ending inventory was listed as $40,000 instead of $38,000. Hence ending inventory of 2004 is overstated by $2,000

Year 2005:

The ending inventory of 2004 is beginning inventory of 2005. So the beginning inventory of 2005 remains overstated by $2,000

Cost of goods sold = Beginning inventory + Purchases - Ending inventory

From above formula of cost of goods sold, assuming that there are no other errors, overstated (by $2,000) beginning inventory for 2005, will result in overstated (by $2,000) cost of goods sold for 2005.

As such option A is correct.

Option B is incorrect since overstated ending inventory for 2004 will not result in overstated ending inventory for 2005

Option C is incorrect. Cost of goods sold of 2005 is overstated and this will result in understated Gross Income and understated net income

Option D is incorrect. As stated above, beginning inventory of 2005 is overstated.