Question

If the beginning inventory for 2014 is overstated, what are the effects of this error on cost of goods sold for 2014, net income for 2014, and assets at December 31, 2015, respectively?

Answer 1

If the beginning inventory for 2014 is overstated, it will lead to an overstatement of cost of goods sold for 2014 and a lower net income for the year. Additionally, it will result in an understatement of assets at December 31, 2015.

Step-by-step explanation:

If the beginning inventory for 2014 is overstated, it means that the value of the inventory at the start of the year is higher than its actual value. This error will have the following effects:

1. Cost of goods sold (COGS) for 2014: If the beginning inventory is overstated, it means that the cost of goods sold will also be overstated. This is because the calculation of COGS involves subtracting the ending inventory from the sum of beginning inventory and purchases. With an overstated beginning inventory, the COGS will be higher, resulting in a lower net income.
2. Net income for 2014: As mentioned earlier, an overstated beginning inventory will lead to a higher COGS. This, in turn, will reduce the net income for 2014. Net income is calculated by subtracting the expenses (including COGS) from the revenues. So, if COGS increases, the net income decreases.
3. Assets at December 31, 2015: The overstated beginning inventory of 2014 will carry forward and affect the calculation of ending inventory for 2014. Ending inventory for 2014 will be understated as a result. This means that the calculation of assets at December 31, 2015, will also be incorrect. Assets at December 31, 2015, include the ending inventory of the previous year, and an understated ending inventory will result in an understatement of assets.