Question

Which of the following items would most likely be considered material to the financial statement user?

1) A $1,000 overstatement in total revenues of $100,000 that turns a $20,000 profit into a $21,000 profit.
2) A $1,000 overstatement in total revenues of $100,000 that turns a $500 loss into a $500 profit.
3) A $1,000 understatement in total revenues of $100,000 that turns a $7,000 loss into a $8,000 loss.
4) A $1,000 understatement in total revenues of $100,000 that turns a $20,000 profit into a $19,000 profit.

Answer 1

The most material item is the $1,000 overstatement that turns a $500 loss into a $500 profit as it changes the perception of the company's performance from negative to break-even.

Step-by-step explanation:

The item that would most likely be considered material to the financial statement user in this scenario is the situation where a $1,000 overstatement in total revenues of $100,000 turns a $500 loss into a $500 profit. The reason this is seen as material is that the misstatement has a significant impact on the company's reported net income, changing it from a loss to a break-even point. In contrast, the other scenarios involve either a relatively small change in recorded profit ($20,000 to $21,000 or $20,000 to $19,000) or increase the amount of loss ($7,000 to $8,000) which is not as impactful in terms of investing and financing decisions. The concept of materiality in financial reporting revolves around the idea that the omission or misstatement of information should be considered material if it could influence the economic decisions made by users of the financial statements.