Effects of inventory error. Assume that the ending inventory of a merchandising

Question

Effects of inventory error. Assume that the ending inventory of a merchandising firm is overstated by $40,000.00.
A. By how much and in what direction (overstated or understated) will the firm's cost of goods sold be misstated?
B. If this error is not corrected, what effect will it have on the subsequent period's operating income?
C. If this error is not corrected, what effect will it have on the total operating income of the two periods (i.e., the period in which there is an error and the subsequent period ) combined?

Explanation / Answer

Effects of inventory error. Assume that the ending inventory of a merchandising firm is overstated by $40,000.00. A. By how much and in what direction (overstated or understated) will the firm's cost of goods sold be misstated? ? Cost of goods sold will be understated. B. If this error is not corrected, what effect will it have on the subsequent period's operating income? ? Subsequent period’s operating income will be understated. C. If this error is not corrected, what effect will it have on the total operating income of the two periods (i.e., the period in which there is an error and the subsequent period ) combined? ? The Error will not have any effect on the total operating income. Current period’s income (overstated) will be compensated by the next period’s Operating income (understated).

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