Which financial statements will be properly stated if the Year 1 ending inventory balance is understated?
A)Year 1 balance sheet.
B)Year 2 balance sheet.
C)Year 1 income statement.
D)Year 2 income statement.

Question

Quizplus · Accepted Answer

In terms of the balance sheet,an understatement in ending inventory at the end of Year 1 understates current assets,total asset,and total stockholders' equity at the end of Year 1.In terms of the income statement,if ending inventory was understated in Year 1,Cost of Goods Sold was overstated and Gross Profit and Income before Income Tax Expense would be understated in Year 1.(Net Income would be understated as well,although the effects would be offset somewhat by understated Income Tax Expense. )
The Year 1 ending inventory becomes the Year 2 beginning inventory,so even if Year 2 ending inventory is calculated correctly,the error in Year 1 creates an error in Year 2.Ending inventory and current assets,total assets,and stockholders' equity will be properly stated on the balance sheet at the end of Year 2.However,in terms of the income statement,if beginning inventory was understated in Year 2,Cost of Goods Sold was overstated and Gross Profit and Income before Income Tax Expense would be understated in Year 2.

Which Financial Statements Will Be Properly Stated If the Year