Aaron Company uses the periodic inventory system. If Aaron's ending inventory is understated due to an accounting error, what is the effect on net income and the ending balance of retained earnings?

Question

Quizplus · Accepted Answer

If ending inventory is understated, cost of goods sold will be overstated, which in turn will decrease net income. Since net income is a component of retained earnings, the ending balance of retained earnings will also be lower.

Aaron Company Uses the Periodic Inventory System