An error in ending inventory affects the balance sheet and net income in both the current and next month. Overstating ending inventory inflates assets and net income now and increases COGS next month. Understating ending inventory has the opposite effect.
The question asks about the effect of an error in ending inventory on the assets balance. When ending inventory is misstated, it affects not only the cost of goods sold (COGS) and net income for the current month but also carries over into the next month. Specifically, the error will understate or overstate assets in the balance sheet and retained earnings in the equity section for the current period, and this misstatement will continue to affect the next period's financial statements as well because the ending inventory of one period becomes the beginning inventory of the next.
If ending inventory is overstated, assets and net income will be overstated in the current period. The next period will then start with an inflated beginning inventory, leading to a higher cost of goods sold when the correction is made, which would subsequently reduce net income in the next period. Conversely, if ending inventory is understated, current period assets and net income will be understated, and the next period will face a reduced beginning inventory, resulting in a lower COGS and potentially higher net income for the next period when the correction is made.