If a company overstates its ending inventory balance for 2012 by $10,000,and understates its ending inventory balance for 2011 by $5,000 what are the effects on its net income for 2012 and 2011? Effect on 2012 Net Income Effect on 2011 Net Income

Question

Quizplus · Accepted Answer

Overstating ending inventory in 2012 would result in an overstatement of the cost of goods sold and a corresponding understatement of gross profit in 2012. This would lead to an overstatement of net income in 2012 by $10,000. Understating ending inventory in 2011 would have the reverse effect, resulting in an understatement of cost of goods sold and an overstatement of gross profit in 2011. This would lead to an overstatement of net income in 2011 by $5,000. Therefore, the effects on net income for 2012 would be an overstatement of $10,000, and the effects on net income for 2011 would be an understatement of $5,000. The net effect would be an overstatement of $15,000 between the two years.

If a Company Overstates Its Ending Inventory Balance for 2012