Question

in january 2025, an inventory error was discovered by the chief financial officer of the company: ending inventory at december 31, 2024 was overstated by $19,600. what effect did this error have on the financial statements prepared at december 31, 2024? (ignore income taxes).

assets are unaffected; liabilities are overstated; net income is overstated; shareholders equity is overstated

assets are overstated; liabilities are unaffected; net income is understated; shareholders equity is understated

assets are understated; liabilities are unaffected; net income is overstated; shareholders equity is overstated

assets are overstated; liabilities are unaffected; net income is overstated; shareholders equity is overstated

Explanation:

Step1: Recall inventory - asset relationship

Inventory is an asset. Over - stating ending inventory over - states assets.

Step2: Recall cost of goods sold formula

Cost of Goods Sold (COGS) = Beginning Inventory + Purchases - Ending Inventory. Over - stating ending inventory under - states COGS.

Step3: Recall net income relationship

Net Income = Revenues - COGS - Other Expenses. With under - stated COGS, net income is over - stated.

Step4: Recall shareholders' equity relationship

Shareholders' Equity = Beginning Equity+ Net Income - Dividends. With over - stated net income, shareholders' equity is over - stated. Liabilities are not affected by inventory errors (ignoring income taxes).

Answer:

Assets are overstated; Liabilities are unaffected; Net income is overstated; Shareholders' Equity is overstated