Question

During the taking of its physical inventory on December 31, Barry's Bike Shop incorrectly counted its inventory as $204,505 instead of the correct amount of $166,687. The effect on the balance sheet and income statement would be:___________.

a. assets overstated by $37,818 retained earnings understated by $37.818, and not income statement understated by $37.818
b. assets overstated by $204,505; retained earnings understated by $166,687, and no effect on the income statement
c. assets, retained earnings, and net income all overstated by $37.818
d. assets and retained earnings overstated by $166,687; and net income understated by $204,505

Answer 1

c. assets, retained earnings, and net income all overstated by $37.818

Step-by-step explanation:

Given that

Inventory correct amount is $166,687

And, the Inventory wrongly recorded is $204,505

So

inventory was overstated by

= $204,505 - $166,687

= $37,818

As the ending inventory is overstated so the net income is also overstated and if the net income is overstated then the retained earnings would be overstated

hence, the correct option is c.