Ricardo Clothing uses a periodic inventory system and committed an error that overstated inventory at the end of Year One. Assuming no further errors occur during the following year, at the end of Year Two:
A) profit is understated; equity is overstated.
B) profit is understated; equity is correct.
C) profit is overstated; equity is correct.
D) profit is overstated; equity is overstated.

Question

Quizplus · Accepted Answer

An overstatement of inventory at the end of Year One leads to an overstatement of profit for Year One. This causes equity to be overstated at the end of Year One. However, in Year Two, the beginning inventory is overstated, leading to an understatement of profit for Year Two. By the end of Year Two, the cumulative effect on equity is corrected, as the overstatement in Year One is offset by the understatement in Year Two.

Ricardo Clothing Uses a Periodic Inventory System and Committed an Error