Question

Overstating ending inventory has what affect on stockholder's equity in the next period?

Answer 1

Overstating ending inventory can impact stockholder's equity by increasing it in the next period.

Step-by-step explanation:

Overstating ending inventory can have a significant impact on stockholder's equity in the next period. Ending inventory is an important component in calculating the cost of goods sold, which is deducted from revenue to determine net income. By overstating ending inventory, the cost of goods sold will be understated, resulting in higher net income. This, in turn, increases stockholder's equity.

For example, if a company reports higher ending inventory than what is actually on hand, it will result in lower cost of goods sold and higher net income. As net income is a part of stockholder's equity, the overstatement of ending inventory will increase stockholder's equity in the following period.

Answer 2

Overstating ending inventory leads to an understated COGS and an inflated net income for the period. As a result, stockholder's equity is temporarily overstated due to the inflation of net income. However, this effect is corrected in the next period when accurate inventory valuation is applied, leading to a reduction in net income and stockholder's equity.

Step-by-step explanation:

Overstating ending inventory can have significant effects on a company's financial statements, which will consequently affect the stockholder's equity in the next period. If ending inventory is overstated, the cost of goods sold (COGS) will be understated because the ending inventory is subtracted from the total goods available for sale during the period to determine COGS.

An understatement of COGS leads to an overstatement of the net income for that period. Since net income contributes to retained earnings and retained earnings are a component of stockholder's equity, an overstated net income results in an overstated stockholder's equity.

In the next period, the overstated ending inventory becomes the overstated beginning inventory. This distortion will need to be corrected in the subsequent period, which would result in higher COGS and lower net income for that period. Therefore, the overstating of inventory has a temporary inflationary impact on stockholder's equity, which would likely correct itself in the following period when the accurate inventory valuation is applied.

The complete question is: Overstating ending inventory has what affect on stockholder's equity in the next period? is: