Othello Company understated its inventory by $20,000 at December 31, 2017. It did not correct the error in 2017 or 2018. As a result, Othello's stockholder's equity was:
A) understated at December 31, 2017, and overstated at December 31, 2018.
B) understated at December 31, 2017, and properly stated at December 31, 2018.
C) overstated at December 31, 2017, and overstated at December 31, 2018.
D) understated at December 31, 2017, and understated at December 31, 2018.

Question

Quizplus · Accepted Answer

The understatement of inventory in 2017 leads to an understatement of assets and equity in 2017. However, by the end of 2018, the error self-corrects in the financial statements, as the beginning inventory for 2018 is understated, leading to an understatement of cost of goods sold and an overstatement of net income, thus properly stating equity by December 31, 2018.

Othello Company Understated Its Inventory by $20,000 at December 31