If the inventory at the end of the current year is understated and the error is never caught,the effect is to:
A)Understate income this year and overstate income next year.
B)Overstate income this year and understate income next year.
C)Understate income this year with no effect on income next year.
D)Overstate the cost of goods sold,but have no effect on net income.

Question

Quizplus · Accepted Answer

When inventory is understated at the end of the current year, it leads to an overstatement of the cost of goods sold (COGS), which in turn understates net income for the current year. The next year, the beginning inventory will be understated, which will understate COGS and overstate net income, assuming no correction is made for the error.

If the Inventory at the End of the Current Year