An understatement of year 1's ending inventory will
A)cause year 2's cost of goods sold to be overstated.
B)result in an understatement of year 2's beginning inventory.
C)not affect year 2's ending owner's equity.
D)have no effect on year 2's gross margin.

Question

Quizplus · Accepted Answer

An understatement of year 1's ending inventory will result in an understatement of year 2's beginning inventory, as the ending inventory of one year becomes the beginning inventory of the next year. This, in turn, will cause year 2's cost of goods sold to be overstated, as the company will assume that more inventory was sold than there actually was. This will affect year 2's gross margin, as well as net income and owner's equity.

An Understatement of Year 1's Ending Inventory Will