Final answer:
If ending inventory is overstated, net income, retained earnings, and working capital are also overstated in that period.
Step-by-step explanation:
An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions.
If the ending inventory is overstated, it means that the value of inventory reported on the balance sheet is higher than the actual value. When this happens, it leads to an overstatement of net income in that period. This is because the cost of goods sold is understated, resulting in higher profit. Since net income affects retained earnings, they will also be overstated. Additionally, working capital, which is the difference between current assets and current liabilities, will be overstated because an overstated ending inventory inflates the value of current assets.