Ending inventory for the current period is understated.What effect will this error have on equity?

Question

Quizplus · Accepted Answer

Ending inventory is a component of inventory, which is a current asset. Understating ending inventory would mean overall inventory is understated. As a result, cost of goods sold would be overstated and net income would be understated, which would in turn lead to an understatement of equity at the end of the current period. However, this error would be corrected in the next period when the correct ending inventory amount is carried forward to the current period, thus resulting in correct equity in the next period.

Ending Inventory for the Current Period Is Understated