During the year 2011-2012, the value of closing inventory was overstated by 25,000. Which of the following is true?
Correct answer: C. The retained earnings was overstated during 2011-2012 and retained earnings will be understated during 2012-2013
- A. The cost of goods sold was overstated during 2011-2012 and income will be understated during 2012-2013
- B. The income was overstated during 2011-12 and closing inventory will be overstated during 2012-2013
- C. The retained earnings was overstated during 2011-2012 and retained earnings will be understated during 2012-2013
- D. The cost of goods sold was understated during 2011-2012 but retained earnings will not be affected during 2012-2013
Explanation
Overstated closing inventory makes cost of goods sold lower and current-year income and retained earnings higher by 25,000. The overstatement becomes overstated opening inventory in the next year, causing next year's income and retained earnings to be understated.
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About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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