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 is correct with respect to inventories?

An understatement of ending inventory will have no effect on net income.

Inventory errors are always corrected automatically in the following accounting period.

An overstatement of ending inventory will result in an overstatement of net income.

Inventory errors only affect the balance sheet and not the income statement.

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Verified step by step guidance

Step 1: Understand the relationship between inventory and net income. Inventory is a key component in calculating the cost of goods sold (COGS), which directly impacts net income. The formula for COGS is: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \).

Step 2: Analyze the impact of an overstatement of ending inventory. If ending inventory is overstated, COGS will be understated because the subtraction of a larger ending inventory reduces the COGS value. Lower COGS leads to higher net income.

Step 3: Evaluate the statement 'An understatement of ending inventory will have no effect on net income.' This is incorrect because an understatement of ending inventory increases COGS, which reduces net income.

Step 4: Consider the statement 'Inventory errors are always corrected automatically in the following accounting period.' This is incorrect because inventory errors do not automatically correct themselves; they require adjustments by the accountant.

Step 5: Assess the statement 'Inventory errors only affect the balance sheet and not the income statement.' This is incorrect because inventory errors affect both the balance sheet (inventory asset) and the income statement (COGS and net income).