Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Inventory Errors

Financial Accounting

5. Inventory

Inventory Errors

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Multiple Choice

Which of the following statements regarding inventory errors is true?

Overstating beginning inventory will increase net income for the period.

An overstatement of ending inventory will overstate net income for the period.

Inventory errors only affect the current period and not future periods.

An understatement of ending inventory has no effect on the balance sheet.

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Verified step by step guidance

Understand the relationship between inventory and net income: Inventory errors can affect the calculation of Cost of Goods Sold (COGS), which in turn impacts net income. The formula for COGS is:

COGS = Beginning Inventory + Purchases - Ending Inventory

Analyze the impact of overstating beginning inventory: If beginning inventory is overstated, COGS will be higher, which reduces net income. Therefore, the statement 'Overstating beginning inventory will increase net income for the period' is false.

Evaluate the impact of overstating ending inventory: If ending inventory is overstated, COGS will be lower, which increases net income. This makes the statement 'An overstatement of ending inventory will overstate net income for the period' true.

Consider the effect of inventory errors on future periods: Inventory errors in one period can carry over to the next period because the ending inventory of one period becomes the beginning inventory of the next. Therefore, the statement 'Inventory errors only affect the current period and not future periods' is false.

Assess the impact of understating ending inventory on the balance sheet: Understating ending inventory reduces assets (inventory is an asset) and also affects retained earnings (part of equity). Thus, the statement 'An understatement of ending inventory has no effect on the balance sheet' is false.