If the inventory reported on a Gottleib Company's statement of financial position at December 31, 2013 is overstated by €1,200,000, the company's retained earnings balance at December 31, 2014 will be
A) understated by €1,200,000.
B) correct.
C) overstated by €1,200,000.
D) need more information to determine.

Question

Quizplus · Accepted Answer

The overstatement of inventory in 2013 would have caused an overstatement of net income for that year, which would increase retained earnings. However, by the end of 2014, the error would have corrected itself through the cost of goods sold, leaving retained earnings correct.

If the Inventory Reported on a Gottleib Company's Statement of Financial