Ending inventory for the year ended December 31, 2010, is overstated by $10,000. How will this affect net income for 2011?

Question

Quizplus · Accepted Answer

The overstatement in ending inventory for 2010 will result in cost of goods sold being understated by $10,000. This will cause the gross profit to be overstated by $10,000 ($10,000 less cost of goods sold). Since gross profit is a component of net income, net income for 2011 will also be overstated by $10,000 (unless of course there are other factors affecting net income). Therefore, choice A is correct.

Ending Inventory for the Year Ended December 31, 2010, Is