Question

I would like help with both 17 and 18! thank you!!

17) What would happen if there was an error in ending inventory and nobody knew of the error? A. If the error is noticed, the person who counted it incorrectly will get fired. B. If the error is noticed, the IRS will close down the business. C. If the error is not found or corrected, it will fix itself within a 2 year period. D. Everyone in the company will go to jail 18) What effect will an overstatement of ending inventory at the end of Year 1 have on the amounts reported on the Year 1 financial statements? A) Overstatement of cost of goods sold B) Overstatement of total assets C) Understatement of net income D) Understatement of retained earnings

Answer 1

17)

If there is an error in ending inventory and nobody knew of the error, if the error is not found or corrected, it will fix itself within a two year period.

Correct option is (C)

If ending inventory is overstated in year 1, net income will be overstated in year 1. Ending inventory of year 1 will become beginning inventory of year 2 and due to overstated beginning inventory, net income will be understated in year 2.

Hence, error in ending inventory in year 1, reverses itself in year 2.

18.

Overstatement of ending inventory in year 1, will have the following effects:

- Understatement of cost of goods sold

- Overstatement of net income

- Overstatement of retained earnings

- Overstatement of total assets

Hence, correct option is (B)

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