Which financial statement line item will be misstated if the 2011 ending inventory balance is overstated?

Question

Quizplus · Accepted Answer

Overstating the ending inventory balance in 2011 will result in overstatement of cost of goods sold (COGS) and understatement of gross profit in 2011. This will in turn impact the net income, retained earnings and total assets in the 2011 balance sheet. Furthermore, since the 2011 ending inventory becomes the beginning inventory for 2012, the impact of the overstatement will carry forward into the 2012 income statement and balance sheet, making choices A and B incorrect. However, the impact will not be limited to the 2012 statements, making choice D incorrect. Therefore, the correct answer is C - 2011 and 2012 income statements and 2011 balance sheet only.

Which Financial Statement Line Item Will Be Misstated If the 2011