Regan Company
Regan Company reported net income of $95,000 for Year 1. Early in Year 2, the company discovered that its Year1 ending inventory was overstated by $5,000.
-Refer to the information provided in the figure Regan Company.What would be the financial statement effects of the inventory error for Year 2?

Question

Quizplus · Accepted Answer

The inventory error will lead to an overstatement of ending inventory and an understatement of cost of goods sold for Year 1. This will result in an overstatement of net income for Year 1. When the error is corrected in Year 2, there will be a reduction in ending inventory of $5,000 and an increase in cost of goods sold of $5,000, leading to an understatement of net income and an overstatement of expenses for Year 2. Therefore, the financial statement effects of the inventory error for Year 2 would be expenses being overstated and net income being understated.

Regan Company Regan Company Reported Net Income of $95,000 for Year 1