Impact of inventory

Receipt of new inventory on credit

The candle manufacturing business receives a delivery of $500 of new inventory from a wholesaler. The wholesaler sends an invoice for payment, due in 30 days.

Sale of finished goods for cash

$500 of finished goods is sold for $1,050. The goods are paid for with cash.

What is the impact on assets and equity when ending inventory is overstated?

• Assets and equity are overstated

• Assets and equity are understated

• Liabilities are overstated

• Liabilities are understated

Assets and equity are overstated

If the ending inventory is recorded at a higher value than its actual worth, it is considered an overstatement. This overstatement affects both assets and equity.

What happens to assets and equity when ending inventory is understated?

• Assets and equity are overstated

• Assets and equity are understated

• Liabilities are overstated

• Liabilities are understated

Assets and equity are understated

If the ending inventory is recorded at a lower value than its actual worth, it is considered an understatement. This understatement affects both assets and equity.