An overstatement of ending inventory in the year 20-1 will cause net income to be overstated in the year 20-1.
Identify whether the given statement is true or false.
Answer to Problem 1TF
An overstatement of ending inventory in the year 20-1 will cause net income to be overstated in the year 20-1 is true.
Explanation of Solution
Inventory error: It is the error to identify a mistake in physical count or in pricing qualities. It is also discovered in same accounting period.
The following table shows the effect of inventory errors:
Serial No | Details | Cost of goods sold | Net income | Retained earnings |
1. | Overstatement of ending inventory | Understated | Overstated | Overstated |
2. | Overstatement of purchases | Overstated | Understated | Understated |
3. | Understatement of beginning inventory | Understated | Overstated | Overstated |
4. | Freight-in charges are understated | Understated | Overstated | Overstated |
5. | Understatement of ending inventory | Overstated | Understated | Understated |
6. | Understatement of purchases | Understated | Overstated | Overstated |
7. | Overstatement of beginning inventory | Overstated | Understated | Understated |
8. | Understatement of purchases plus understatement of ending inventory by the same amount | No effect | No effect | No effect |
Table (1)
Thus, the above table indicates that if ending inventory is overstated in the same year (20-1) then it will cause the net income to be overstated in the same year (20-1).
Want to see more full solutions like this?
Chapter 13 Solutions
Bundle: College Accounting, Chapters 1-27, Loose-leaf Version, 22nd + Cengagenowv2™, 2 Terms Printed Access Card For Heintz/parry's College ... Set For College Accounting, 22nd + Cenga
- If ending Inventory is overstated at the end of the year, profit will be: 12 Cvens taled b) Understated c) Correct d) Less than the profit of the previous year e) None of the abovearrow_forwardWhat is the effect of a $51000 overstatement of last year's inventory on current years ending retained earning balance? Overstated by $51000. No effect. Understated by $51000. Need more information to determine.arrow_forwardAssume that in 2021, Graham Company discovered that December 31, 2019 inventory was overstated. Discuss the impact that this error would have had on 2019 net income, 2020 net income and the combined net income of the two years.arrow_forward
- 1. If ending inventory on December 31, 2019, is overstated, then, a) cost of goods sold for the year ended December 31, 2020, will be understated. b) gross profit for the year ended December 31, 2019, will be understated. c) gross profit for the year ended December 31, 2020, will be understated. d) cost of goods sold for the year ended December 31, 2019, will be overstated.arrow_forwardWhat is the effect of a $40000 overstatement of last year's inventory on current years ending retained earning balance? Overstated by $40000. Need more information to determine. Understated by $40000. No effect.arrow_forwardIf beginning inventory is understated by $11800, the effect of this error in the current period is Cost of Goods Sold Net Income Net Income overstated understated understated overstated understated understated overstated overstatedarrow_forward
- An understatement of ending inventory in the year 20-1 will cause netincome to be overstated in the year 20-2, assuming no other errors. (True/False)arrow_forwardThe inventory at the end of the year was understatedby $14,750. (a) Did the error cause an overstatementor an understatement of the gross profit forthe year? (b) Which items on the balance sheet atthe end of the year were overstated or understatedas a result of the error?arrow_forwardIf ending inventory in Period 1 is overstated, gross profit in Period 2 isarrow_forward
- If merchandise inventory is understated at the end of 2020, and the error is not discovered, how will net income be affected in 2021?arrow_forwardSeveral errors are listed below. Indicate the effect each error would have on 2020 net income by selecting a plus sign (+), minus sign (-) or NI (no impact). Part (a) has been completed as an example. Effect on 2020Net Income a. Failed to record a 2020 expense. + b. Ending 2019 inventory is understated. c. Ending 2020 accrued expense is overstated. d. Ending 2020 inventory is overstated. e. Ending 2019 accrued revenue is understated. f. Ending 2020 prepaid expense is overstated. g. Ending 2019 unearned revenue is overstated. h. Ending 2020 accrued revenue was overstated. i. Ending 2019 prepaid expense was overstated. j. Ending 2019 accrued expense is overstated. k. Ending 2020 unearned revenue is understated.arrow_forwardAn understatement of ending inventory by $2 million in one period results ina. an overstatement of gross profit by $2 million in the next period.b. an understatement of gross profit by $2 million in the next period.c. no effect on net income of the next period.d. an overstatement of the beginning inventory by $2 million in the next period.arrow_forward
- College Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College