As a result of overstating ending inventory by $10,000 at the end of Year 1:

Question

Quizplus · Accepted Answer

Overstating ending inventory in Year 1 will result in lower cost of goods sold and higher net income in Year 1. However, in Year 2, the effect reverses, resulting in higher cost of goods sold and lower net income. This is because the overstated ending inventory in Year 1 becomes the starting inventory for Year 2, and any adjustment made to correct for the overstatement will reduce current year income. Hence, net income for Year 2 will be understated.

As a Result of Overstating Ending Inventory by $10,000 at the End