Question

X Company prepares monthly financial statements. In January, it purchased inventory on account. The accountant recorded the transaction as an increase in Inventories and an increase in Retained Earnings. As a result, which of the following is true regarding the January financial statements?

- Inventories were understated.
- Retained Earnings was understated.
-Revenue was understated.
- Expenses were understated.
- Accounts Receivable was overstated.
- Accounts Payable was understated.

Answer 1

Answer:

While purchasing the inventory on account accountant needs to record the transaction as an increase in Inventories and an increase in accounts payable as it increases the payable for inventory purchased.

X Company prepares monthly financial statements. In January, it purchased inventory on account. The accountant recorded the transaction as an increase in Inventories and an increase in Retained Earnings.

As a result increase in inventory is correct by an increase in retained earning results in an overstatement of retained earning & understatement of accounts payable.

Accordingly, the correct option is " Accounts Payable was understated.".