Question

If the ending inventory for 2020 is overstated, the effects of this error on cost of goods sold for 2020 , net income for 2020 , and assets at December 31,2020 , respectively, are a.overstatement, understatement, overstatement. b.understatement, overstatement, no effect. c.understatement, overstatement, overstatement. d.overstatement, understatement, no effect.

Answer 1

If the ending inventory for 2020 is overstated, it will result in an understatement of cost of goods sold, an overstatement of net income, and an overstatement of assets at December 31, 2020.

Step-by-step explanation:

The effects of an overstated ending inventory on cost of goods sold for 2020, net income for 2020, and assets at December 31, 2020 are as follows:

1. Cost of Goods Sold: Since ending inventory is overstated, it means that the cost of goods sold will be understated. This is because the overstatement of ending inventory will result in a lower cost of goods sold calculation.
2. Net Income: With a lower cost of goods sold, the net income for 2020 will be overstated. This is because lower costs will result in higher profits, leading to an inaccurate measurement of the company's profitability.
3. Assets: The overstatement of ending inventory will result in an overstatement of assets at December 31, 2020. Ending inventory is part of the current assets on the balance sheet, and an overstatement will inflate the total assets of the company.