Myrna Company overstated the beginning inventory on January 1, 2010, by $20, 000.No other errors were identified.If the error is not discovered, which of the following net income effects related to the inventory error are true? $\begin{array}{llll}
&\text { Net Income }\
&2009&2010&2011\

\text { I. } & \text { understated } & \text { overstated } & \text { correct } \
\text { II. } & \text { overstated } & \text { understated } & \text { correct } \
\text { III. } & \text { correct } & \text { understated } & \text { overstated } \
\text { IV. } & \text { overstated } & \text { understated } & \text { overstated }
\end{array}$

A)I
B)II
C)III
D)IV

Question

Myrna Company overstated the beginning inventory on January 1, 2010, by $20, 000.No other errors were identified.If the error is not discovered, which of the following net income effects related to the inventory error are true? $\begin{array}{llll}
&\text { Net Income }\
&2009&2010&2011\

\text { I. } & \text { understated } & \text { overstated } & \text { correct } \
\text { II. } & \text { overstated } & \text { understated } & \text { correct } \
\text { III. } & \text { correct } & \text { understated } & \text { overstated } \
\text { IV. } & \text { overstated } & \text { understated } & \text { overstated }
\end{array}$

A)I
B)II
C)III
D)IV

Quizplus · Accepted Answer

The overstatement of beginning inventory will also overstate cost of goods sold and thus reduce gross margin. This will result in a higher net income. Therefore, both option II, which states that net income will be overstated, and option IV, which states that gross margin will be overstated, are true. Option I is not true because there is no effect on operating expenses. Option III is not true because there is no effect on sales revenue.

Myrna Company Overstated the Beginning Inventory on January 1, 2010