Ending inventory is overstated due to a costing error but purchases are correct. The balance sheet would be correct in the succeeding year because the previous years error would have been counterbalanced.

Question

Quizplus · Accepted Answer

This statement is true because the overstatement of ending inventory in the previous year would have resulted in an understatement of cost of goods sold and overstatement of net income in the previous year. However, when the correct balance is established in the succeeding year, it would result in a decrease in net income for that year, which would counterbalance the previous year's error. As a result, the balance sheet would be correct in the succeeding year.

Ending Inventory Is Overstated Due to a Costing Error but Purchases