Final answer:
A misstatement in inventory that overstates assets by $100,000 is most likely to be deemed material, given that it significantly distorts actual asset values and could heavily influence financial decision-making. Other misstatements might be material depending on the context of the business, but inventory stands out due to its larger absolute value.
Step-by-step explanation:
Determining the Effect of Financial Misstatements
When considering which relatively small misstatements would have a material effect on an entity's financial statements, there are several factors to keep in mind. Materiality in financial reporting relates to whether an omission or misstatement of information is likely to influence the economic decisions of users taken on the basis of the financial statements. A misstatement may involve monetary amounts, the presentation of information, or the disclosure of information. The concept of materiality is subjective and varies depending on the size and nature of the entity, the amounts involved, and the particular circumstances. In the options provided:
- A misstatement in revenue that overstates income by $1,000 may not be material for a large corporation but could be significant for a small business.
- A misstatement in accounts payable that understates liabilities by $10,000 could have a material impact because it distorts the financial position by understating obligations.
- A misstatement in inventory that overstates assets by $100,000 is quite likely to be material due to its sizable impact on the asset values and potentially on profit margins and tax calculations.
- A misstatement in depreciation expense that understates expenses by $1,000 is often considered less material, unless it cumulatively contributes to a significant error over time.
Out of the choices listed, a misstatement in inventory that overstates assets by $100,000 is most likely to be deemed material, as it represents a significant distortion of actual asset values and could affect various financial ratios and performance indicators used by stakeholders.
Applying Self-Check Examples
Using the provided self-check example:
Accounting profit = total revenues minus explicit costs = $1,000,000 - ($600,000 + $150,000 + $200,000) = $50,000.
This is an illustration of calculating a firm's accounting profit, which is a common financial metric used to determine the profitability of a company over a specific period.