Washington Co. mistakenly omitted $4,000 of merchandise from its inventory on December 31, 2016. Its December 31, 2017, inventory is correct. As a result of this error,

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CWhen inventory is understated by $4,000 in 2016, it causes the cost of goods sold (COGS) for 2016 to be overstated, leading to an understatement of net income for that year. However, because the 2017 inventory is correct, the error does not carry over, and the total income over the two years remains accurate, as the overstatement in 2016 COGS corrects itself in 2017. The current ratio, which compares current assets to current liabilities, is also affected in 2016 because inventory is a current asset. If inventory is understated, current assets are understated, potentially overstating the current ratio if liabilities remain constant. By 2017, since the inventory error is corrected, the current ratio would also be correct, assuming no other errors.