Inventory at the end of the current year is overstated by $20,000. What effect will this error have on the following year's net income?

Question

Quizplus · Accepted Answer

Overstating the ending inventory in the current year will cause the cost of goods sold (COGS) to be understated, leading to an overstatement of net income in the current year. In the following year, the beginning inventory (which is the overstated ending inventory from the current year) will be too high, causing the COGS to be overstated and net income to be understated. However, the effect will only offset the previous year's overstatement, not double it, leading to an understatement of net income by $20,000.

Inventory at the End of the Current Year Is Overstated