An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.

Question

Quizplus · Accepted Answer

Ending inventory is a component of assets and therefore, if the ending inventory is understated, it will lead to an overall understatement of assets on the balance sheet. Additionally, equity is affected as it is calculated as assets minus liabilities. Therefore, an understatement of assets will also result in an understatement of equity.

An Understatement of Ending Inventory Will Cause an Understatement of Assets