Inventory at the End of the Current Year Is Overstated

question 55

Multiple Choice

Inventory at the end of the current year is overstated by $20,000. What effect will this error have on the following year's net income?

• A)Net income will be overstated $20,000.
• B)Net income will be understated $20,000.
• C)Net income will be correctly stated.
• D)Net income will be understated $40,000.

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Definitions:

Net Realizable Value

The projected price at which goods are sold, minus the expenses associated with their sale or disposal.

Gross Profit

The profit a company makes after subtracting the costs associated with making and selling its products, or the costs associated with providing its services.

LIFO

"Last In, First Out," an inventory costing method where the last items purchased are the first ones sold, affecting the cost of goods sold and ending inventory valuation.

FIFO

A stock rotation and accounting method that assumes the oldest inventory items are sold or used first.