Accounting Online Program Certification Practice Test

What is the effect of remedial work on the defective items at Stacks plc?

1. Increased closing inventory

2. Decreased selling expenses

3. Profits from selling the items only

4. No impact on financial statements

The correct answer is: Increased closing inventory

Remedial work on defective items typically involves repairing or refurbishing those items so they can be sold again. This process usually leads to an increase in the closing inventory on the balance sheet. By performing remedial work, Stacks plc is likely enhancing the value of the previously defective items, thereby categorizing them as inventory that can generate future revenue. When defective items are repaired, their estimated resale value increases, which contributes to a higher figure in the inventory line item. This reflects the company's effort to correct the defects and turn what would have been a loss into a potential profit opportunity. Consequently, increased closing inventory provides a more accurate representation of the company's asset base at period-end. The other choices do not appropriately reflect the impact of the remedial work. Increased selling expenses typically relate to costs incurred while selling products, which would not be directly affected by fixing defective items. Profits from selling the items only focus on the revenue side rather than the asset representation on the balance sheet. Lastly, stating no impact on financial statements would ignore the reality that the remedial work effectively enhances the inventory value, thus impacting the financial statements positively.