An error that overstates the ending inventory will cause profit for the period to be understated.

Question

Quizplus · Accepted Answer

An overstated ending inventory will result in a lower cost of goods sold, which will lead to a higher gross profit. However, since the ending inventory is an asset, the overstatement will also result in a higher total asset balance. This will lead to a lower net income, as the higher asset balance will increase the denominator in the return on assets calculation.

An Error That Overstates the Ending Inventory Will Cause Profit