Question

During the taking of its physical inventory on December 31, Barry's Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be

a. assets overstated by $70,000; retained earnings understated by $70,000; and net income statement understated by $70,000.
b. assets and retained earnings overstated by $70,000 and net income understated by $70,000.
c. assets overstated by $70,000; retained earnings understated by $70,000; and no effect on the income statement.
d. assets, retained earnings, and net income all overstated by $70,000.

Answer 1

The correct answer is B.

Step-by-step explanation:

If your inventory is miss-accounting and reflected in accounting items, the company has to make a corrective entry that reflects the true value of its assets. Therefore, it must expose the asset and retained earnings and the underestimated value of net earnings of $70,000.

Have a nice day!