If ending inventory is overstated by $3,000 in 20X3,retained earnings at the end of 20X4 will be correctly stated.

Question

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Overstated ending inventory in 20X3 will lead to overstated cost of goods sold in 20X4, which will result in understated net income in 20X4. This understated net income will lead to understated retained earnings at the end of 20X4. However, the overstated ending inventory in 20X3 will be reversed in 20X4, leading to overstated cost of goods sold in 20X5 and overstated net income in 20X5. This overstated net income will lead to overstated retained earnings at the end of 20X5, which will offset the understated retained earnings at the end of 20X4. Therefore, retained earnings at the end of 20X4 will be correctly stated.

If Ending Inventory Is Overstated by $3,000 in 20X3,retained Earnings