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

An understatement of ending inventory will cause:

Assets to be overstated

Cost of goods sold to be understated

Owner's equity to be overstated

Net income to be understated

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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 the balance sheet.

Recall the formula for COGS: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \). If ending inventory is understated, COGS will be overstated because the subtraction of a smaller value increases the result.

Recognize the impact of overstated COGS on net income. Net income is calculated as \( \text{Net Income} = \text{Revenue} - \text{Expenses} \), where COGS is an expense. An overstated COGS reduces net income, causing it to be understated.

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

Understand the impact on owner's equity. Owner's equity is affected by net income through retained earnings. Since net income is understated, retained earnings will also be understated, leading to an understatement of owner's equity.