An understatement of the ending inventory in Year 1,if not corrected,will cause which of the following?
A)The year 1 net income to be understated and Year 2 net income to be overstated.
B)The year 1 net income to be overstated and Year 2 net income to be overstated.
C)The year 1 net income to be overstated and Year 2 net income will be correct.
D)The year 1 net income to be overstated and Year 2 net income to be understated.

Question

Quizplus · Accepted Answer

If the ending inventory is understated in Year 1, the cost of goods sold will be overstated, which will result in an understated net income for Year 1. If not corrected, the understated ending inventory will also affect Year 2 net income because the overstated cost of goods sold in Year 1 will lead to a lower beginning inventory for Year 2. Thus, Year 2 net income will be overstated.

An Understatement of the Ending Inventory in Year 1,if Not