If ending inventory on December 31, 2011, is overstated by $60,000, what is the effect on net income for 2012?

Question

Quizplus · Accepted Answer

If the ending inventory on December 31, 2011, is overstated by $60,000, it means that the cost of goods sold (COGS) for 2012 will be understated by the same amount. This is because the overstated inventory will be carried forward as the beginning inventory for 2012, and the cost of goods sold will be calculated by subtracting the cost of goods available for sale (beginning inventory + purchases) from this figure. Therefore, the cost of goods sold will be too low, and net income will be understated by $60,000.

If Ending Inventory on December 31, 2011, Is Overstated by $60,000