If ending inventory for the year ended December 31, 2019, is understated, this error will cause shareholders' equity to be:

Question

Quizplus · Accepted Answer

When ending inventory is understated, it causes the cost of goods sold to be overstated, which in turn understates net income and thus shareholders' equity at the end of 2019. The error corrects itself in the following year, assuming no further errors, making shareholders' equity correctly stated at the end of 2020.

If Ending Inventory for the Year Ended December 31, 2019