Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

1. Introduction to Accounting

Fundamental Accounting Equation

Financial Accounting

1. Introduction to Accounting

Fundamental Accounting Equation

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Multiple Choice

Under the fundamental accounting equation, understating beginning inventory will understate which of the following?

Net income

Ending inventory

Cost of goods sold

Sales revenue

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Verified step by step guidance

Step 1: Recall the fundamental accounting equation: Assets = Liabilities + Equity. In this context, inventory is an asset, and changes in inventory directly impact the calculation of cost of goods sold (COGS), which is a key component of net income.

Step 2: Understand the relationship between beginning inventory, purchases, ending inventory, and cost of goods sold. The formula for COGS is:

COGS = Beginning Inventory + Purchases - Ending Inventory

. If beginning inventory is understated, it will directly affect the calculation of COGS.

Step 3: Analyze the impact of understating beginning inventory. If beginning inventory is understated, the calculated COGS will be lower than it should be because the formula subtracts less inventory from purchases.

Step 4: Consider the effect of lower COGS on net income. Since net income is calculated as:

Net Income = Sales Revenue - COGS - Operating Expenses

, a lower COGS will result in a higher net income.

Step 5: Conclude that understating beginning inventory does not directly affect ending inventory or sales revenue but does understate COGS, which in turn impacts net income calculations.