An inventory error begins with a difference between the reported amount and the amount supported by the quantity, ownership, cutoff, cost, or measurement evidence. Write that signed difference first. A positive sign means inventory is overstated; a negative sign means it is understated.
Ending inventory is subtracted when cost of goods sold is derived. Its error therefore enters cost of goods sold with the opposite sign. Gross profit and pretax income take the inventory sign. At the reporting date, inventory, total assets, and retained earnings before tax also take that sign. This inventory- only bridge does not identify an omitted payable, sale, return, tax effect, or cash-flow error caused by the same event.
If the error remains in next year's opening inventory and next year's ending inventory is correct, the income effect reverses. The two-year pretax sum is zero, but each annual result was wrong. Materiality, tax, EPS, covenant, compensation, control, and comparative-statement effects remain separate work.
ASC 330-10-05-3 provides inventory reporting context. For a prior-period error discovered after issuance, ASC 250-10-45-23 sets the correction route. Paragraph 45-24 addresses opening retained earnings and comparative statements. Paragraphs 50-7 through 50-9 address disclosures when statements are restated.
Trace the Cedar worked bridge, then complete the independent Northstar task.
Put the concept to work
Understand this concept
- Explain how an ending-inventory overstatement or understatement affects current cost of goods sold, pretax income, assets, and equity and reverses through next-period cost if uncorrected.
Apply this concept
- State what an overstatement or understatement of ending inventory does to cost of goods sold, gross profit, and net income in the year it happens.
Analyze this concept
- Trace a supplied inventory error across statements and periods, distinguish counterbalancing from harmless, and prepare the reporting-period correction with tax and comparative-statement research open.
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- Cost of goods sold — Understand
To apply this concept: Required. The effect runs through cost of goods sold first.
- Inventory error — Understand
To analyze this concept: Required. Correction follows the propagation map.
To apply this concept: Required. Stating the effect requires knowing what the error is.
- Inventory — Analyze
To understand this concept: Required. The rollforward transmits an ending error into cost of goods sold.
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Use this idea next
- Inventory error — Analyze
Required level here: understand. Required. Correction follows the propagation map.
- Inventory error — Apply
Required level here: understand. Required. Stating the effect requires knowing what the error is.