Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements?

A. Sales.

B. Cash.

C. Inventory.

D. Accounts receivable.

Question

Business

Karley Bartlett

25 October, 00:31

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements?

A. Sales.

B. Cash.

C. Inventory.

D. Accounts receivable.

+4

Answers (1)

Know the Answer?

Ian Ward · Answer 1

The answer is C, that is, for the inaccurate accounting recording described in the question, inventory is most likely to be overstated.

Explanation:

For the year XX, any sales happening in the last two days of the year must be recorded in the year XX. However, as sales journal closes 02 days before year end, these recordings will be recorded in (XX + 1) year.

As a sales transaction happens, Cash and Account Receivable go up (Dr), Sales also increases (Cr) while Inventory decreases (Cr).

With the early closing of sales journal, as explained above, if any sales takes place in the last two days of the year, Cash and Account Receivable and Sales for the year XX will be understated (because they are inaccurately recorded in the (XX+1) year) and Inventory will be understated (also because they are inaccurately recorded in the (XX+1) year).