Question

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was omitted from the year-end physical count. How will these errors affect assets, liabilities, and stockholders' equity at year end and net income for the year?

assets liabilities stockholders' equity net income
a. no effect understate overstate overstate
b. no effect overstate understate understate
c. understate understate no effect no effect
d. understate no effect understate understate

Answer 1

The errors will affect assets, liabilities, stockholders' equity, and net income in different ways.

Step-by-step explanation:

Under the given scenario, the errors will affect the assets, liabilities, stockholders' equity, and net income in the following ways:

1. Assets: The omission of the purchase of merchandise will result in an understatement of assets since the merchandise is not included in the year-end physical count.
2. Liabilities: There will be no effect on liabilities since the purchase was made on account, and the company still owes the amount to the supplier.
3. Stockholders' Equity: The omission of the purchase will result in an understatement of stockholders' equity since the value of the merchandise is not included in the equity calculation.
4. Net Income: The omission of the purchase will result in an understatement of net income since the cost of the merchandise is not recognized as an expense in the income statement.