Latone Company began operations in 2014.During the first two years of operations,Latone made undiscovered errors in taking its year-end inventories that understated 2014 ending inventory by $40,000 and overstated 2015 ending inventory by $50,000.The combined effect of these errors on reported income is 2014 2015 2016
A) understated $40,000 overstated $50,000 not affected
B) understated $40,000 overstated $10,000 not affected
C) understated $40,000 overstated $90,000 understated $50,000
D) overstated $40,000 understated $50,000 overstated $10,000

Question

Quizplus · Accepted Answer

The errors in inventory affect the reported income for both years 2014 and 2015. The understatement of 2014 ending inventory by $40,000 would have led to an understatement of Cost of Goods Sold (COGS) for that year, making reported net income higher than it should have been. Conversely, the overstatement of 2015 ending inventory by $50,000 would have led to an overstatement of COGS for that year, making reported net income lower than it should have been.

Therefore, the combined effect of these errors is an understatement of net income in 2014 (by $40,000) and an overstatement of net income in 2015 (by $50,000). The errors do not affect reported income in 2016 since they have been corrected by that year. Hence, option C is the correct answer.

Latone Company Began Operations in 2014