As a result of understating ending inventory by $10,000 at the end of Year 1:

Question

Quizplus · Accepted Answer

Understating ending inventory in Year 1 will cause the cost of goods sold (COGS) for Year 1 to be overstated, which in turn reduces net income for Year 1. The understated ending inventory for Year 1 becomes the understated beginning inventory for Year 2. This results in a lower COGS for Year 2 (assuming all else equal), which leads to an overstatement of net income for Year 2.

As a Result of Understating Ending Inventory by $10,000 at the End