Mark Company overstated the beginning inventory on January 1, 2016, by $20,000. No other errors were identified. If the error is not discovered, which of the following net income effects related to the inventory error are true? $${ \text { Net Income } } \
\begin{array} { l l l l }
\hline
&2015&2016&2017\\hline
\text { I. } & \text { understated } & \text { overstated } & \text { correct } \
\text { II. } & \text { overstated } & \text { understated } & \text { correct } \
\text { III. } & \text { correct } & \text { understated } & \text { overstated } \
\text { IV. } & \text { overstated } & \text { understated } & \text { overstated }
\end{array}$$
A) I
B) II
C) III
D) IV

Question

Mark Company overstated the beginning inventory on January 1, 2016, by $20,000. No other errors were identified. If the error is not discovered, which of the following net income effects related to the inventory error are true? $${ \text { Net Income } } \
\begin{array} { l l l l } 
\hline
&2015&2016&2017\\hline
\text { I. } & \text { understated } & \text { overstated } & \text { correct } \
\text { II. } & \text { overstated } & \text { understated } & \text { correct } \
\text { III. } & \text { correct } & \text { understated } & \text { overstated } \
\text { IV. } & \text { overstated } & \text { understated } & \text { overstated }
\end{array}$$
A) I
B) II
C) III
D) IV

Quizplus · Accepted Answer

Overstating beginning inventory causes cost of goods sold (COGS) to be overstated, which understates net income for that year. The error corrects itself the following year, as ending inventory for one year is the beginning inventory for the next. Thus, in 2016, net income would be understated, and by 2017, the effects of the error would no longer impact net income, assuming no further errors.

Mark Company Overstated the Beginning Inventory on January 1, 2016