Final answer:
An incorrect ending inventory value impacts both the balance sheet and the income statement because it leads to a misstated cost of goods sold, which affects net income, as well as the total current assets on the balance sheet.Therefore, the correct answer to the student's question is: d. Both the balance sheet and the income statement are affected.
Step-by-step explanation:
If the amount assigned to ending inventory is incorrect, it impacts both the balance sheet and the income statement. This is because the ending inventory figures are used to calculate the cost of goods sold (COGS) on the income statement. If the ending inventory is underestimated, COGS will be overestimated, which leads to lower net income. Conversely, if the ending inventory is overestimated, COGS is underestimated, resulting in higher net income.On the balance sheet, ending inventory is reported as a current asset. Thus, if it is underreported or overreported, the total assets and therefore the owner's equity or retained earnings, depending on the structure of the business, may be incorrectly stated. Both financial statements are intrinsically linked through the inventory calculation, and errors in ending inventory distort the financial picture presented by both the income statement and balance sheet.