CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

If Beaver Company fails to count a section of its warehouse and thus understates its ending inventory, which of the following would be true?

A. Total assets and net income would be understated, while stockholder's equity would be overstated.
B. Net income, total assets, and stockholder's equity would all be understated.
C. Total assets would be understated, while net income and stockholder's equity would be overstated.
Correct Answer: B

Since inventory is an asset, total assets would be understated. If inventory is understated, cost of goods sold would be overstated, while net income and stockholder's equity would both be understated (A=L + S/E).

User Contributed Comments 3

User Comment
cp24 How could we deduce that the COGS would be overstated without knowing the co's inventory valuation method? Pls. help. Thanks.
nike the inventory method does not matter here: BI + Purchases - COGS = EI.
johntan1979 It's either you assign cost to COGS or Inventory.

If Inventory is understated, the opposite is true for COGS, regardless of the inventory method.
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