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 true about inventory errors in financial accounting?

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

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

Inventory errors are always corrected automatically in the following period.

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 financial statements: Inventory is a key component of both the income statement and the balance sheet. Errors in inventory valuation can impact cost of goods sold (COGS), net income, and the reported value of inventory on the balance sheet.

Analyze the impact of an overstatement of ending inventory: If ending inventory is overstated, COGS will be understated because COGS is calculated as: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \). Lower COGS leads to higher net income for the period.

Evaluate the statement that inventory errors only affect the income statement: This is incorrect because inventory errors also affect the balance sheet. Inventory is reported as a current asset on the balance sheet, so any error in its valuation will impact the total assets reported.

Consider whether inventory errors are automatically corrected in the following period: This is not true. While inventory errors may reverse in subsequent periods due to the flow of inventory costs, they are not automatically corrected. Adjustments must be made to ensure accurate reporting.

Assess the claim that an understatement of ending inventory has no effect on the balance sheet: This is incorrect because an understatement of ending inventory reduces the value of current assets on the balance sheet, which impacts total assets and potentially equity.