Practice prompt · Q:inventory-ownership-cost-flow-and-measurement/inventory-error-first-year-001

State what an overstated ending inventory does this year

Tests whether the learner traces an ending inventory error through cost of goods sold to net income.

Updated Sep 11, 2026 Review due Nov 18, 2026

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A count error overstates ending inventory by 40,000. Beginning inventory and purchases are recorded correctly.

The formula is the whole argument: beginning inventory plus purchases less ending inventory. Ending inventory is subtracted, so the error reaches income with its sign flipped.

Choose the best answer. a Cost of goods sold is understated by 40,000, and net income and ending equity are overstated by the pretax effect of 40,000. b Cost of goods sold is overstated by 40,000, and net income is understated. c Cost of goods sold is unaffected, because the error is on the balance sheet. d Net income is overstated by 40,000 and cost of goods sold is unaffected.

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Answer: a

Choice a. Overstating the ending figure understates cost of goods sold, which overstates gross profit and net income.