On December 31,Year 1,Owings Corporation overstates the ending inventory by $5,000.How will this affect the amount of retained earnings shown on the balance sheet at December 31,Year 2?

Question

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Overstating inventory at the end of Year 1 will cause cost of goods sold to be understated for Year 1,which causes net income to be overstated.Since the Year 1 ending inventory becomes the Year 2 beginning inventory,cost of goods sold will be overstated for Year 2,which will cause net income to be understated.The overstatement of Year 1 net income will be offset by the understatement of Year 2 net income and retained earnings will be correctly stated at the end of Year 2.

On December 31,Year 1,Owings Corporation Overstates the Ending Inventory by $5,000.How