The ending merchandise inventory for the current year is overstated by $25,000.What effect will this error have on the following year's net income?

Question

Quizplus · Accepted Answer

The ending merchandise inventory is an asset on the balance sheet, and an overstatement of it will cause an overstatement of the current year's net income. However, the error will be corrected in the following year when the overstated inventory is sold, resulting in a lower cost of goods sold and less profit. Therefore, the following year's net income will be understated by the amount of the overstatement of the ending merchandise inventory, which is $25,000.

The Ending Merchandise Inventory for the Current Year Is Overstated