During the taking of its physical inventory on December 31, 2014, Barry's Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be

A) assets overstated by $70,000; retained earnings understated by $70,000; and net income statement understated by $70,000
B) assets overstated by $70,000; retained earnings understated by $70,000; and no effect on the income statement
C) assets, retained earnings, and net income all overstated by $70,000
D) assets and retained earnings overstated by $70,000; and net income understated by $70,000

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Jennifer Alicia Hernandez · Accepted Answer

Final Answer : C, Explanation :  Overstating inventory by $70,000 would cause assets to be overstated by the same amount. Since inventory is an asset, the balance sheet would show $70,000 more in assets than actually exists. This overstatement would also cause both net income and retained earnings to be overstated. Net income is overstated because the cost of goods sold would be understated (less inventory cost recognized), leading to higher profits. Higher profits increase retained earnings, thus both are overstated by $70,000.

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