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 about inventory errors is true?

Overstating beginning inventory will increase net income for the current year.

An overstatement of ending inventory in the current year will overstate net income for the current year.

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

An understatement of ending inventory in the current year will have no effect on the next year's net income.

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Verified step by step guidance

Step 1: Understand the relationship between inventory and net income. Inventory errors affect both the balance sheet and the income statement because inventory is a key component in calculating the cost of goods sold (COGS), which directly impacts net income.

Step 2: Analyze the impact of overstating beginning inventory. Overstating beginning inventory increases the cost of goods sold (COGS), which decreases net income for the current year. This statement is false.

Step 3: Evaluate the effect of overstating ending inventory. Overstating ending inventory reduces the cost of goods sold (COGS), which increases net income for the current year. This statement is true.

Step 4: Address the claim that inventory errors only affect the balance sheet. This is incorrect because inventory errors also affect the income statement through the calculation of COGS and net income.

Step 5: Examine the impact of understating ending inventory on the next year's net income. An understatement of ending inventory in the current year will result in an understatement of beginning inventory for the next year, which affects the calculation of COGS and net income for the next year. This statement is false.