Question

Zinke Company understated its ending inventory at the end of Year 1. Which of the following...

Zinke Company understated its ending inventory at the end of Year 1. Which of the following correctly states the effect of the error on the amounts shown on the Year 1 financial statements?

Understatement of total assets and gross margin.

Understatement of liabilities and retained earnings.

Overstatement of cost of goods sold and retained earnings.

Overstatement of total assets and cost of goods sold.
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Answer #1

Answer : Option A ( Understatement of total assets and gross margin.)

Explanation : As the Inventory balance is reported on the assets side of the balance sheet the total assets will be understated & as it is credited to the income statement the gross margin will also be understated if the Zinke Company understated its ending inventory at the end of Year 1.Therefore option A i.e.,Understatement of total assets and gross margin would be the effect of the error on the amounts shown on the Year 1 financial statements.

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