If a company understates its ending balance of inventory in year 1 and it records inventory correctly in year 2,which one of the following is true?

Question

Quizplus · Accepted Answer

If the ending balance of inventory is understated in year 1, the cost of goods sold for year 1 will be overstated. When the inventory is correctly recorded in year 2, there will be an adjustment to the beginning balance of inventory, which will result in a lower cost of goods sold for year 2. Therefore, the cost of goods sold will be overstated in year 2.

If a Company Understates Its Ending Balance of Inventory in Year