If the ending inventory is understated in Year 1, then the Gross Profit will be understated in Year 2.

Question

Quizplus · Accepted Answer

If the ending inventory is understated in Year 1, it directly affects the cost of goods sold (COGS) for Year 1, not Year 2. The understatement of ending inventory in Year 1 would lead to an overstatement of COGS in Year 1, thus understating the gross profit in Year 1. The beginning inventory for Year 2 would be understated, but this does not directly affect the gross profit for Year 2 unless there are further errors in accounting for Year 2's inventory or COGS.

If the Ending Inventory Is Understated in Year 1, Then