There Is an Error in Computing Ending Inventory in Year

question 117

Multiple Choice

There is an error in computing ending inventory in Year 1. Therefore:

• A) the error will have no effect on Year 2 financial statements.
• B) after three years, the inventory error will counterbalance.
• C) gross profit will continue to be incorrect until an adjusting entry is made.
• D) the total gross profit for Year 1 and Year 2 combined will be correct.

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Definitions:

Liquidity and Efficiency

Financial metrics that evaluate how quickly a company can meet its short-term obligations with its available assets and how effectively it utilizes its resources.

Solvency

The ability of an entity to meet its long-term financial obligations and continue its operations in the long term.

Profitability

The degree to which a business or activity yields profit or financial gain.

Financial Statement Analysis

The process of examining and analyzing a company's financial statements to make better economic decisions.