An overstatement of the 2015 ending inventory results in an understatement of net income during 2016.

Question

Quizplus · Accepted Answer

If the 2015 ending inventory is overstated, it means that the cost of goods sold in 2015 was understated, resulting in an overstatement of net income. However, since inventory is a balance sheet account, the overstatement would carry over to the 2016 beginning inventory. As a result, the cost of goods sold and net income for 2016 would be overstated.

An Overstatement of the 2015 Ending Inventory Results in an Understatement