The following errors were made in 20x3: an understatement of purchases of $500 and an understatement of ending inventory of $500.The net effect on the 20x3 ending amount of retained earnings is:

Question

Quizplus · Accepted Answer

The errors offset each other because an understatement of purchases would decrease the cost of goods sold, increasing net income, while an understatement of ending inventory would increase the cost of goods sold, decreasing net income. Since these effects cancel each other out, there is no net effect on the ending amount of retained earnings.

The Following Errors Were Made in 20x3: an Understatement of Purchases