Final answer:
Inventory errors can impact the computation of cost of goods sold and net income. Errors in recording inventory levels can lead to inaccurate calculations, affecting net income. Overstating or understating ending inventory can result in higher or lower net income respectively.
Step-by-step explanation:
Inventory errors can have a significant impact on the computation of cost of goods sold and net income in two periods. Cost of goods sold is calculated by subtracting the ending inventory from the beginning inventory and adding the purchases made during the period. If there are errors in recording the inventory levels, it can lead to an inaccurate calculation of cost of goods sold. This, in turn, affects the calculation of net income, as net income is calculated by subtracting expenses, including cost of goods sold, from revenue.
For example, if the ending inventory is overstated due to an error, it will result in a lower cost of goods sold, which means higher net income. Conversely, if the ending inventory is understated, it will result in a higher cost of goods sold, which means lower net income. Therefore, inventory errors can distort the financial performance of a company and misrepresent its profitability.