Before year 2, Deroit Co. used the cash basis of accounting. As of December 31, year 2, Deroit changed to the accrual basis. Deroit cannot determine the beginning balance of supplies inventory.  What is the effect of Deroit’s inability to determine beginning supplies inventory on its year 2 accrual basis net income and December 31, year 2 accrual-basis owners’ equity?
 
              Year 2 Net income        12/31/Y2 Owners' equity
 
　　A.             Yes                                  Yes
　　B.             Yes                                   No
　　C.             No                                   Yes
　　D.             No                                    No
 
　　Answer:B
　　B is corrent.  Inability to determine beginning supplies inventory would cause supplies expense to be understated and year 2 net income to be overstated. Cumulative supplies expense would be properly stated so there would be no effect on December 31, year 2 retained earnings.
　　A is incorrect.    Inability to determine beginning supplies inventory would cause supplies expense to be understated and year 2 net income to be overstated. Cumulative supplies expense would be properly stated so there would be no effect on December 31, year 2 retained earnings.
　　C is incorrect.   Inability to determine beginning supplies inventory would cause supplies expense to be understated and year 2 net income to be overstated. Cumulative supplies expense would be properly stated so there would be no effect on December 31, year 2 retained earnings.
　　D is incorrect.  Inability to determine beginning supplies inventory would cause supplies expense to be understated and year 2 net income to be overstated. Cumulative supplies expense would be properly stated so there would be no effect on December 31, year 2 retained earnings.