Final answer:
If the ending inventory is understated by $15,500 in 2016, it results in a net income understatement for 2016 and an overstatement of net income for 2017 by the same amount.
Step-by-step explanation:
When a company understates its ending inventory, it has the effect of overstating the cost of goods sold (COGS) because the inventory that should have been carried over to the next period is wrongly expensed in the current period. Therefore, for 2016, if the ending inventory is understated by $15,500, the COGS for that year is overstated by $15,500, leading to an understatement of the net income of 2016 by the same amount. Conversely, because the beginning inventory of 2017 will be $15,500 lower than it should be, the COGS for 2017 will be understated, and the net income for 2017 will be overstated by $15,500, assuming that no correction is made for the error. Hence, the correct answer to the question is
d. Overstated by $15,500 ... Understated by $15,500