Question

Company X uses FIFO to value inventory on a periodic basis. If the beginning inventory for 2011 is 100 units and the inventory valuation is erroneously overstated, and X purchases 100 units and sells 100 units over the period, the effects of the error on cost of goods sold for 2011, net income for 2011, and assets for 2011 end, respectively, are:

Answer 1

Answer:overstatement ; understatement ; no effect

Explanation: The cost of goods sold for 2011 will be overstated since the beginning inventory stated is more than what is actually in the inventory and the goods sold is just 100 units which is from the 100 units purchased inventory.

The net income will be understated due to the erroneous increment in the number of beginning inventory.

Assets for 2011 year end will be unaffected as inventory will be retaken at year end In other to ascertain ending inventory.