What is the effect of a $50,000 overstatement of last year's inventory on current years ending retained earning balance?
A) Understated by $50,000.
B) No effect.
C) Overstated by $50,000.
D) Need more information to determine.

Question

Quizplus · Accepted Answer

An overstatement of last year's inventory does not affect this year's ending retained earnings balance because the error would correct itself within the accounting cycle of the current year. The overstatement would increase the cost of goods sold and decrease net income for last year, but it would not carry over to affect this year's retained earnings.

What Is the Effect of a $50,000 Overstatement of Last