If a company overstates its ending inventory balance for 2017 by $10,000, and overstates its ending inventory balance for 2016 by $5,000 what are the effects on its net income for 2017 and 2016?
Effect on 2017 Net Income Effect on 2016 Net Income
A) Overstated by $5,000 Overstated by $5,000
B) Overstated by $15,000 Overstated by $10,000
C) Overstated by $10,000 Overstated by $5,000
D) Understated by $5,000 Overstated by $10,000

Question

If a company overstates its ending inventory balance for 2017 by $10,000, and overstates its ending inventory balance for 2016 by $5,000 what are the effects on its net income for 2017 and 2016? ​
Effect on 2017 Net Income Effect on 2016 Net Income
A) Overstated by $5,000 Overstated by $5,000
B) Overstated by $15,000 Overstated by $10,000
C) Overstated by $10,000 Overstated by $5,000
D) Understated by $5,000 Overstated by $10,000

Quizplus · Accepted Answer

Overstating ending inventory for a period decreases the cost of goods sold (COGS), leading to an overstatement of net income. For 2017, the net income is overstated by the difference in overstatement from 2016 to 2017 ($10,000 - $5,000 = $5,000). The 2016 net income is overstated by the initial overstatement amount of $5,000.

If a Company Overstates Its Ending Inventory Balance for 2017