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

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

The understatement of the ending inventory balance causes which of the following effects on net income for the period?

Net income to be overstated

No effect on net income

Net income to be understated

Net income to be unaffected in the following period

Previous problemNext problem

Verified step by step guidance

Understand the relationship between inventory and net income: Ending inventory is a component of the Cost of Goods Sold (COGS) calculation, which directly affects net income. COGS = Beginning Inventory + Purchases - Ending Inventory.

Analyze the impact of an understated ending inventory: If the ending inventory is understated, the COGS will be overstated because a smaller ending inventory value is subtracted in the formula.

Recognize the effect of overstated COGS: When COGS is overstated, net income is understated because Net Income = Revenue - Expenses, and COGS is an expense.

Consider the following period: The understated ending inventory in the current period becomes the beginning inventory for the next period. This will cause the COGS in the next period to be understated, leading to an overstated net income in the following period.

Conclude the overall effect: The understatement of ending inventory causes net income to be understated in the current period and overstated in the following period, maintaining the balance over time.