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.

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Definitions:

Inelastic Segment

Part of a demand curve where the quantity demanded changes very little with a change in price, indicating consumers' relative insensitivity to price changes.

Maximum Profits

The highest possible financial gain that a company can achieve in a given period while accounting for all costs and expenses.

Nondiscriminating Monopolist

A monopolist who charges all consumers the same price for a good or service, regardless of the demand or cost conditions.

Demand Schedule

A table that shows the quantity of a good or service demanded at various prices.