Question

The Preston Company received merchandise on consignment. Preston included the goods in inventory as of April 30, but did not record the transaction. What would the effect of this be on its financial statements for April 30

Answer 1

Answer and Explanation:

The effect of this transaction on financial statement would be as under:

For Inventory :

Goods were received on consignment, these should not been recorded in inventories, but these goods are recorded in inventories. It means inventories are Overstated.

For Current Assets :

Inventories are part of current assets and if inventories are overstated, it means current assets are also overstated.

For Retained Earnings:

Inventories are overstated, it mean the profit shall be overstated ,and it shall increase the retained earnings . Hence retained earnings are also overstated.