If ending inventory for the current period is understated, then owner's equity will be:

Question

Quizplus · Accepted Answer

If ending inventory is understated, the cost of goods sold (COGS) will be overstated, which leads to understated net income. Since net income contributes to owner's equity, owner's equity will also be understated. The error corrects itself in the next period when the beginning inventory is understated, balancing out the effects over the two periods.

If Ending Inventory for the Current Period Is Understated, Then