The beginnings inventory of the current year is overstated by 5,000 and closing inventory is overstated by 12,000. These errors will cause the net income for the current year by
Correct answer: C. 7,000 (overstated.
- A. 17,000 (overstated.
- B. 12,000 (understated.
- C. 7,000 (overstated.
- D. 7,000 (understated.
Explanation
An overstated opening inventory increases cost of goods sold and understates profit by 5,000, while an overstated closing inventory decreases cost of goods sold and overstates profit by 12,000. The net effect is an overstatement of profit by 7,000.
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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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