. Buffalo Inc. buys inventory items for $300 each and sells them for $400 each.
ID: 2597093 • Letter: #
Question
. Buffalo Inc. buys inventory items for $300 each and sells them for $400 each. During the year, the company bought and sold hundreds of these items. The company uses a perpetual system. One unit was sold near the end of the year. The recording was a debit to cash for $400, a credit to inventory for $300, and a credit to gain on sale of inventory for $100. No other entry or correction was made. Which of the following statements is true about Buffalo’s reported information for the period? a. Gross profit was correct, net income was overstated, and inventory was understated. b. Gross profit was understated, net income was understated, and inventory was correct. c. Gross profit was understated, net income was correct, and inventory was correct. d. Gross profit was correct, net income was understated, and inventory was overstated.
Explanation / Answer
Statement which should be recorded when the inventory was sold should be:
Entry which was done was:
So the effect will be:
b. Gross profit was understated, net income was understated, and inventory was correct.
as Sales was not recorded in the PnL which caused profit to reduce.
So, correct answer is b.
Sold Cash 400 Sales 400 Cost of goods sold 300 Merchandise Inventory 300Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.