If a company overstates its Inventory balance at the end of 2015 due to an error,its Retained Earnings will also be overstated on the 2015 balance sheet.

Question

Quizplus · Accepted Answer

Inventory is an asset on the balance sheet, and an overstatement of inventory will result in an overstatement of assets. Retained earnings, on the other hand, are part of equity and are not affected by changes in assets. However, if the overstatement of inventory results in an overstatement of net income for the year, then retained earnings will also be overstated.

If a Company Overstates Its Inventory Balance at the End