If ending inventory for the year is overstated, stockholders' equity reported on the balance sheet at the end of the year is understated.

Question

Quizplus · Accepted Answer

Overstating ending inventory causes cost of goods sold to be understated, which in turn overstates net income. Since net income contributes to retained earnings, a component of stockholders' equity, stockholders' equity would be overstated, not understated.

If Ending Inventory for the Year Is Overstated, Stockholders' Equity