Effect of Overstated Ending Inventory on Net Income in 2023 and 2024

20 Jul 2021

In 2023, ending inventory is overstated

Net income is overstated in 2023 and understated in 2024. Therefore, the correct option is C).

Explanation: In the scenario where ending inventory is overstated in 2023, the effect of the error on net income in 2023 and 2024 is as follows:

In 2023, net income is overstated because a higher ending inventory results in a lower cost of goods sold (COGS) and consequently, a higher gross profit and net income.
In 2024, net income is understated because the higher ending inventory in 2023 becomes the beginning inventory in 2024. This results in a higher COGS in 2024, which leads to a lower gross profit and net income.

Therefore, the correct answer is C. Net income is overstated in 2023 and understated in 2024.

Answer: It's C

Explanation: trust.