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

The understatement of the ending inventory balance causes:

Cost of goods sold to be understated

Net income to be understated

Owner's equity to be overstated

Total assets to be overstated

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Verified step by step guidance

Understand the relationship between ending inventory and financial statements: Ending inventory is a component of the Cost of Goods Sold (COGS) calculation, which directly impacts net income and owner's equity.

Analyze the impact of an understated ending inventory: If ending inventory is understated, the Cost of Goods Sold (COGS) will be overstated because the formula for COGS is: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \). A lower ending inventory increases COGS.

Determine the effect on net income: Since COGS is overstated, net income will be understated because \( \text{Net Income} = \text{Revenue} - \text{Expenses} \), and COGS is an expense.

Evaluate the impact on owner's equity: Net income contributes to retained earnings, which is part of owner's equity. If net income is understated, owner's equity will also be understated.

Assess the effect on total assets: Ending inventory is part of current assets on the balance sheet. If ending inventory is understated, total assets will also be understated.