2.2 Inventory—Fundamentals Flashcards
1
Q
A company’s inventory is overstated at December 31 of this year. The result will be
A. Understated income this year
B. Understated retained earnings this year.
C. Understated retained earnings next year.
D. Understated income next year
A
D. Understated income next year
Overstated ending inventory results in understated cost of goods sold, overstated net income, and overstated retained earnings in the period of the error. When these errors reverse in the following period, beginning inventory and cost of goods sold will be overstated, and net income will be understated. Retained earnings will be correct.
