The ending merchandise inventory for the current year is overstated by $20,000. What effect will this error have on the following year's net income?

Question

Quizplus · Accepted Answer

Since the ending inventory for the current year is overstated by $20,000, it means that the cost of goods sold for the current year has been understated by $20,000 ($20,000 worth of inventory was recorded as an expense that should have been recorded as an asset). As a result, the cost of goods sold for the following year will be overstated by $20,000, leading to a reduction in net income for that year. Therefore, the correct answer is C, the net income will be understated by $20,000.

The Ending Merchandise Inventory for the Current Year Is Overstated