If the beginning inventory for 2006 is overstated, the effects of this error on cost of goods sold for 2006, net income for 2006, and assets at December 31, 2007, respectively, are
A)overstatement, understatement, overstatement.
B)overstatement, understatement, no effect.
C)understatement, overstatement, overstatement.
D)understatement, overstatement, no effect.

Question

Quizplus · Accepted Answer

If the beginning inventory for 2006 is overstated, it will result in an overstatement of cost of goods sold for 2006 because the calculation for cost of goods sold involves subtracting the beginning inventory from the cost of goods available for sale. This will also result in an understatement of net income for 2006 because cost of goods sold is subtracted from revenue to calculate net income. However, there will be no effect on assets at December 31, 2007 because the error only affects the 2006 financial statements.

If the Beginning Inventory for 2006 Is Overstated, the Effects