If ending inventory is understated by $3,000 in 20X3,net income in 20X4 will be overstated.

Question

Quizplus · Accepted Answer

If ending inventory is understated in 20X3, cost of goods sold (COGS) is overstated, which decreases net income. However, in 20X4, the understated ending inventory from the previous year will be included in the beginning inventory, which will lead to a lower COGS and higher gross profit. This, in turn, will increase net income in 20X4, leading to an overstatement. Therefore, the statement is true.

If Ending Inventory Is Understated by $3,000 in 20X3,net Income