The beginnings inventory of the current year is overstated by ` 5,000 and closing inventory is overstated by ` 12,000. These errors will cause the net income for the current year by
A)17,000 (overstated)
B)12,000 (understated)
C)7,000 (overstated)
D)7,000 (understated)

Question

Quizplus · Accepted Answer

When the beginning inventory is overstated, it means the cost of goods sold (COGS) is also overstated, leading to an understatement of net income. However, when the ending inventory is overstated, COGS is understated, leading to an overstatement of net income. The net effect is the difference between the overstatement of the ending inventory and the beginning inventory, which is `12,000 - `5,000 = `7,000 overstated.

The Beginnings Inventory of the Current Year Is Overstated by `