Assume ending inventory is overstated at the end of Year 1 and correctly stated at the end of Year 2.Owners' equity will be correctly stated at the end of Year 2.

Question

Quizplus · Accepted Answer

Ending inventory is part of the calculation for cost of goods sold and gross profit. An overstatement of ending inventory in Year 1 would result in an overstatement of gross profit and net income for that year. However, since the overstatement is corrected in Year 2, the net income for that year will be correctly stated as well. As a result, the owners' equity will also be correctly stated at the end of Year 2.

Assume Ending Inventory Is Overstated at the End of Year