[amp_mcq option1=”understate cost of goodsmanufactured in that period” option2=”overstate current assets” option3=”overstate gross profit from sales in that period” option4=”understate net income in that period” correct=”option4″]
The correct answer is: D. Understate net income in that period.
Work-in-progress is a measure of the costs of goods that have been partially completed but are not yet ready for sale. It is included in the cost of goods sold, which is a major expense on the income statement. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit and net income.
Here is a more detailed explanation of each option:
- A. Understate cost of goods manufactured in that period. This is incorrect because work-in-progress is included in the cost of goods manufactured. When work-in-progress is understated, the cost of goods manufactured will also be understated.
- B. Overstate current assets. This is incorrect because work-in-progress is not a current asset. It is an asset that is used in the production of goods and services.
- C. Overstate gross profit from sales in that period. This is incorrect because gross profit is calculated by subtracting the cost of goods sold from sales. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit.
- D. Understate net income in that period. This is correct because net income is calculated by subtracting expenses from revenues. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit and net income.