During the taking of its physical inventory on December 31, 2014, Barry's Bike Shop incorrectly counted its inventory as $226,826 instead of the correct amount of $175,448. The effect on the balance sheet and income statement would be a.assets overstated by $51,378; retained earnings understated by $51,378; and net income statement understated by $51,378 b.assets overstated by $51,378; retained earnings understated by $51,378; and no effect on the income statement c.assets, retained earnings, and net income all overstated by $51,378 d.assets and retained earnings overstated by $51,378; and net income understated by $51,378

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A:

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.