Question: What is the effect of inventory valuation on financial statements?

Options:

1. It affects only the balance sheet
2. It affects only the income statement
3. It affects both the balance sheet and income statement
4. It has no effect on financial statements

Correct Answer: It affects both the balance sheet and income statement

Solution:

Inventory valuation impacts both the balance sheet (as it determines the value of current assets) and the income statement (as it affects the cost of goods sold and net income).