Failure to take an inventory and make an adjusting entry???

Question

Your company recorded office supplies in an asset account when the supplies were purchased. Failure to take an inventory and make an adjusting entry will result in an

a. understatement of assets.
b. understatement of stockholders' equity.
c. overstatement of stockholders' equity.
d. understatement of liabilities.

Answer 1

A

Be careful!

Answer 2

c. overstatement of stockholders' equity.

1. Assets are overstated because now some are already used.
2. Used up supplies - are actually a way to lower the asset.
Used up supplies are supplies expense.
Expenses lower stockholders' equity.
Stockholders equity represents something you own.
You can't own something that is used up and therefore is no longer there to state it's an asset.
3. The liability is created when you purchase the office supplies. Whether the office supplies are used or not, has nothing to do with the liability to pay for them.
So The liability is the same whether you have all of the supplies, or whether you use all of them up during the month or year.

I hope you understand that an asset either depreciates (goes down in value as you own it) or goes down as you use the item and that is shown by taking an inventory of how much is left at the end of the time period.

GOD Bless us always.
MBA-Boston Univ.
CPA-retired

Answer 3

A. because office supplies goes under assets and if you don't adjust the office supplies then you have shortchanged yourself in the assets.

Answer 4

A

Answer 5

e. TERMINATION