If ending inventory is overstated,the error will affect two income statement periods.

Question

Quizplus · Accepted Answer

Ending inventory is a part of cost of goods sold, which affects the calculation of gross profit and net income on the income statement. If ending inventory is overstated in one period, it will result in a lower cost of goods sold and a higher gross profit in that period. However, in the following period, the overstatement of inventory will be corrected, resulting in a higher cost of goods sold and a lower gross profit. Therefore, the error will affect two income statement periods.

If Ending Inventory Is Overstated,the Error Will Affect Two Income