Phillips Corporation overstated its ending inventory on December 31, 2013. Which of the following answers correctly identifies the effect of the error on 2014 financial statements?

Question

Quizplus · Accepted Answer

Overstating ending inventory in 2013 will result in a lower cost of goods sold for that year, which will lead to an overstatement of net income for the year. However, in 2014, when the error is corrected, there will be a higher cost of goods sold and a lower net income due to the adjustment. This is because the cost of goods sold is calculated by subtracting the beginning inventory from the sum of the purchases and the ending inventory, and an overstatement of the ending inventory will result in an understatement of the cost of goods sold.

Phillips Corporation Overstated Its Ending Inventory on December 31, 2013