A $25,000 Overstatement of the 2010 Ending Inventory Was Discovered

Multiple Choice

A $25,000 overstatement of the 2010 ending inventory was discovered after the financial statements for 2010 were prepared.Which of the following describes the effect of the inventory error on the 2011 financial statements?

A) Net income and stockholders' equity are both understated.
B) Net income is understated and stockholders' equity is not affected.
C) Net income and stockholders' equity are both overstated.
D) Net income and stockholders' equity are both unaffected.