An Understatement of the Ending Inventory in Year 1, If

question 112

Multiple Choice

An understatement of the ending inventory in Year 1, if not corrected, will cause which of the following?

• A)The year 1 net income to be understated and Year 2 net income to be overstated.
• B)The year 1 net income to be overstated and Year 2 net income to be overstated.
• C)The year 1 net income to be overstated and Year 2 net income will be correct.
• D)The year 1 net income to be overstated and Year 2 net income to be understateD.The understatement of the year 1 ending inventory causes the year 1 cost of goods sold to be overstated and the year 1 net income is therefore understated.The year 2 cost of goods sold is understated because beginning inventory is understated, which causes the year 2 net income to be overstated.