Question

How will a $25,000 understatement of ending inventory in one year affect the liabilities of the company in both the current and subsequent years?

• :

  It will result in a $25,000 understatement of liabilities in the current year and a $25,000 overstatement in the subsequent year.

• B  :

  It will have no impact on liabilities in either the current or subsequent years.

• C  :

  It will have no impact on liabilities in the current year and result in a $25,000 understatement in the subsequent year.

• D  :

  It will result in a $25,000 understatement of liabilities in the current year and have no impact in the subsequent year.

Answer 1

Solution:

Answer: Option B: It will have no impact on liabilities in either the current or subsequent years.

Explanation: Understatement of ending inventory has no impact on the liabilities of the company. Liabilities are not affected by the inventory errors whether it is a understatement or overstatement of inventory. Understatement of ending inventory will have impact on Cost of Goods Sold, Net Income, Current Assets and Retained Earnings in current and subsequent years. It has no relation with the liabilities. Thus liabilities of current and subsequent years will not be impacted by the understatement of ending inventory. Hence, the correct answer is option b.