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The merchandise and related accounts payable should have been recorded but were not. What would be the effect of these errors on assets, liabilities, retained earnings, and net income respectively?
Answers:
• Understated, understated, no effect, no effect
• Understated, understated, understated, understated
• Understated, overstated, overstated, understated
• Overstated, overstated, understated, overstated
understated assets
understated laibilities
no effect
no effect
It will be a shortage of assets offset by the same decrease in liabilities and a decrease in retained earnings and a decrease in net income
• Understated, understated, understated, understated
• Understated, understated, no effect, no effect
The effects will be as follow:
Assets (Inventory) will be understated by the amount of purchases
Laibilities (Accounts Payable) wil be understated
Retained Earnings : will be overstated (since net income will be overstated)
Net Income: will be overstated (since the COGS will be understated by the amount of purchases)
