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

If ending inventory in 2024 is overstated, which of the following is true?

Net income for 2024 will be overstated.

Total assets at the end of 2024 will be understated.

Retained earnings at the end of 2024 will be understated.

Cost of goods sold for 2024 will be overstated.

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Verified step by step guidance

Step 1: Understand the relationship between ending inventory and net income. Ending inventory is a component of the Cost of Goods Sold (COGS) formula: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \). If ending inventory is overstated, COGS will be understated, which leads to an overstated net income.

Step 2: Analyze the impact on total assets. Ending inventory is reported as an asset on the balance sheet. If ending inventory is overstated, total assets will also be overstated, not understated.

Step 3: Examine the effect on retained earnings. Retained earnings are part of equity and are affected by net income. Since net income is overstated due to the overstated ending inventory, retained earnings at the end of 2024 will also be overstated, not understated.

Step 4: Evaluate the impact on Cost of Goods Sold (COGS). As mentioned earlier, overstated ending inventory results in understated COGS, not overstated COGS.

Step 5: Conclude that the correct statement is: 'Net income for 2024 will be overstated,' based on the logical relationships between ending inventory, COGS, net income, and retained earnings.