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 concerning inventory errors is correct?

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

An overstatement of 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.

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

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Verified step by step guidance

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

Analyze the impact of beginning inventory errors: An overstatement of beginning inventory increases COGS (calculated as Beginning Inventory + Purchases - Ending Inventory), which decreases net income for the current year. Therefore, the statement that an overstatement of beginning inventory increases net income is incorrect.

Evaluate the effect of ending inventory errors: An overstatement of ending inventory decreases COGS (since ending inventory is subtracted in the formula), which increases net income for the current year. This aligns with the correct answer provided in the problem.

Consider the impact of ending inventory errors on the following year: An understatement of ending inventory in the current year will carry over as an understated beginning inventory in the following year. This will increase COGS in the following year, reducing net income. Therefore, the statement that an understatement of ending inventory has no effect on the following year's net income is incorrect.

Summarize the correct answer: The correct statement is that an overstatement of ending inventory in the current year will overstate net income for the current year, as it reduces COGS and increases reported profits.