Merchandise inventory at the end of the year was understated. which of the following statements correctly states the effect of the error? a. net income is understatedb. net income is overstatedc. cost of merchandise sold is understatedd. merchandise inventory reported on the balance sheet is overstated

a. net income is understated

Explanation:

Using the formula

Revenue - cost of sales - operating expense =  net income

opening inventory + purchases - closing inventory = cost of goods sold

From the formulas above,

Understating closing inventory results an overstatement of cost of goods sold which invariably results in an understatement of net income.

The right option is a. net income is understated.