An understatement of the ending inventory in Year 1, if not corrected, will cause which of the following?
A)The year 1 net income to be understated and Year 2 net income to be overstated.
B)The year 1 net income to be overstated and Year 2 net income to be overstated.
C)The year 1 net income to be overstated and Year 2 net income will be correct.
D)The year 1 net income to be overstated and Year 2 net income to be understateD.The understatement of the year 1 ending inventory causes the year 1 cost of goods sold to be overstated and the year 1 net income is therefore understated.The year 2 cost of goods sold is understated because beginning inventory is understated, which causes the year 2 net income to be overstated.

Question

Quizplus · Accepted Answer

An understatement of the ending inventory in Year 1 will cause the Year 1 net income to be understated because the cost of goods sold will be overstated. The cost of goods sold in Year 2 will be understated because the beginning inventory is understated, resulting in the Year 2 net income being overstated. Therefore, the correct answer is A.

An Understatement of the Ending Inventory in Year 1, If