If the beginning inventory for 2014 is overstated, the effects of this error on cost of goods sold for 2014, net income for 2014, and assets at December 31, 2015, 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 2014 is overstated, the cost of goods sold for 2014 will be understated (because you're subtracting a higher number than you should be to get to cost of goods sold, making it artificially lower), which will cause net income to be overstated (since costs are lower than they should be). However, the error does not affect assets at December 31, 2015, since inventory at the end of 2014 would be correctly stated, and any subsequent impacts on inventory values would not be caused by the overstatement in beginning inventory for 2014.

If the Beginning Inventory for 2014 Is Overstated, the Effects