Mikey uses a periodic inventory system and committed an error that understated inventory at the end of Year One. If no further errors occur, at the end of Year Two:
A) profit is overstated; equity is overstated.
B) profit is overstated; equity is correct.
C) profit is understated; equity is understated.
D) profit is understated; equity is overstated.

Question

Quizplus · Accepted Answer

In Year One, ending inventory is understated, causing cost of goods sold to be overstated and profit to be understated. In Year Two, beginning inventory is understated, causing cost of goods sold to be understated and profit to be overstated, correcting equity.

Mikey Uses a Periodic Inventory System and Committed an Error