Question

During the taking of its physical inventory on December 31, 2014, Barry's Bike Shop incorrectly counted its inventory as $206,180 instead of the correct amount of $170,362.

What is the effect on the balance sheet and income statement?
A. Assets overstated by $35,818; retained earnings understated by $35,818; and net income statement understated by $35,818
B. Assets overstated by $35,818; retained earnings understated by $35,818; and no effect on the income statement
C. Assets, retained earnings, and net income all overstated by $35,818
D. Assets and retained earnings overst

Answer 1

The incorrect physical inventory count resulted in overstated assets by $35,818 on Barry's Bike Shop's balance sheet, without initially affecting the income statement or retained earnings for that specific year.

Step-by-step explanation:

During the taking of its physical inventory on December 31, 2014, Barry's Bike Shop incorrectly counted its inventory, leading to an overstatement of assets. If the inventory was counted as $206,180 instead of the correct $170,362, this would result in an overstated assets amount on the balance sheet by $35,818. Since inventory is an asset, the balance sheet would show more assets than actually exist.

However, the income statement would not be directly affected by this error in the physical count of inventory since it affects only the reported asset value on the balance sheet in 2014 and not the net income for that year. It is the subsequent year where cost of goods sold would be impacted due to the incorrect beginning inventory, thus affecting the net income.

Therefore, the correct option would be that Assets are overstated by $35,818 and there is no effect on the net income statement for the year the error was made. Retained earnings would only be understated if the overstatement of inventory was not corrected before the end of the year following the inventory miscount.