Misclassifying a product cost as a period cost will usually cause the income statement to be incorrect, but the balance sheet will not be affected.

Question

Answer the following statement true (T) or false (F)

Answer 1

False

Misclassifying period costs as product costs means that these costs are first accumulated in the Inventory account and then expensed when the goods are sold. As a result, some of the misclassified period costs have passed through the Inventory account into the Cost of Goods Sold account with the rest remaining in the Inventory account. Net income would be misstated by the difference between the understated expense and the misstatement of cost of goods sold. Because some of the misclassified period costs remain in the Inventory account, the balance sheet may also be affected.