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).
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