pt X Company is a merchandiser and prepares monthly financial statements. On May

Question

pt X Company is a merchandiser and prepares monthly financial statements. On May 14, X Company purchased mer- andise from a supplier on account, and its accountant recorded the transaction as an increase in Inventories and a decrease in Retained Earnings. What was the effect of this incorrect entry on the May 31 financial statements? 10.AO Accounts Payable was understated. BO Profit was overstated. CO Inventories were understated. DO Revenue was understated. EO Retained Earnings was overstated. FO Accounts Receivable was overstated.

Explanation / Answer

Answer is

A.Accounts Payable was Understated

Correct entry is

Inventory DR

Account Payable CR

As in the given case Account Payable is not credited hence understatement of Account Payable and resulted in the understatement of retained earnings.

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