If ending inventory on December 31, 2010, is overstated by $30,000, what is the effect on net income for 2011?

Question

Quizplus · Accepted Answer

The effect of overstating ending inventory in one period is that it will understate the cost of goods sold and overstate gross profit. This, in turn, will overstate net income. Therefore, if ending inventory on December 31, 2010, is overstated by $30,000, the cost of goods sold will be understated by $30,000 in 2010. This will result in an overstatement of net income in 2010 by $30,000. However, in 2011, when the overstated inventory is sold, the cost of goods sold will be overstated by $30,000, resulting in an understatement of gross profit and an overstatement of net income by $30,000. Therefore, net income for 2011 is understated by $30,000.

If Ending Inventory on December 31, 2010, Is Overstated by $30,000