Question

On December 30, Crane Co. accepted delivery of merchandise which it purchased on account. As of December 31, Crane had recorded the purchase, but did not include the merchandise in its physical count of ending inventory. The effect of this on its financial statements for December 31 would be

a.net income was understated and current liabilities were overstated.
b.net income, current assets, and retained earnings were understated.
c.net income was correct and current assets were understated.
d.net income was overstated and current assets were understated.

Answer 1

The question pertains to the incorrect exclusion of merchandise from the ending inventory, which results in an overstatement of net income and an understatement of current assets on Crane Co.'s financial statements.

Step-by-step explanation:

The effect of Crane Co. not including the delivered merchandise in its physical count of ending inventory would be d. net income was overstated and current assets were understated. By not including the merchandise in the ending inventory, cost of goods sold (COGS) is erroneously high, which decreases the gross profit and therefore the net income is overstated. Concurrently, the inventory is not correctly stated on the balance sheet, leading to an understatement of current assets.