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 is NOT affected by an error related to ending inventory?

Cost of goods sold

Net income

Sales revenue

Retained earnings

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Verified step by step guidance

Step 1: Understand the components of the problem. Ending inventory errors impact financial statements because they affect the calculation of cost of goods sold (COGS), net income, and retained earnings. Sales revenue, however, is not directly affected by ending inventory errors as it is determined by the sales transactions themselves.

Step 2: Recall the formula for cost of goods sold (COGS): \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \). An error in ending inventory will directly impact the COGS calculation.

Step 3: Understand the relationship between COGS and net income. Net income is calculated as \( \text{Net Income} = \text{Revenue} - \text{COGS} - \text{Operating Expenses} \). Therefore, an error in ending inventory indirectly affects net income through its impact on COGS.

Step 4: Recognize how retained earnings are affected. Retained earnings are part of the equity section of the balance sheet and are influenced by net income. Since net income is affected by ending inventory errors, retained earnings will also be impacted.

Step 5: Confirm that sales revenue is not affected. Sales revenue is based on the total sales made during the period and is independent of inventory calculations. Therefore, it is not impacted by errors in ending inventory.