Final answer:
False. Inventory accounting errors do not always correct themselves in the subsequent accounting period. If errors go undetected, they can reverse the effect in the following period, but correction is crucial for accurate financial statements. Errors can affect cost of goods sold, net income, and balance sheet values.
Step-by-step explanation:
It is generally false to say that inventory accounting errors will correct themselves in the subsequent accounting period. Inventory errors can cause an overstatement or understatement of ending inventory, which directly affects the cost of goods sold, net income, and the balance sheet. However, if an error is made one year and is not detected, it can reverse itself in the following period because the ending inventory of one period becomes the beginning inventory of the next.
For example, if ending inventory is understated in Year 1, the cost of goods sold is overstated, leading to an understatement of net income for that year. In Year 2, the beginning inventory will also be understated, which eventually leads to lower cost of goods sold and an overstatement of the net income for Year 2, assuming no further errors are made.
Nevertheless, it is essential to correct inventory errors as soon as they are discovered to provide accurate financial statements and make sound business decisions. Companies typically amend errors by adjusting the current period's financial statements or by restating prior period financial statements if the error is material.