Overstated Ending Inventory: Impact on Net Income in 2023 and 2024

Effect of Overstated Ending Inventory on Net Income

If the ending inventory is overstated in 2023, what is the effect on net income in 2023 and 2024?

If the ending inventory is overstated in 2023, it means that the value of the inventory is recorded as higher than its actual value. This error will impact the financial statements in both 2023 and 2024.

Net Income Overstated in 2023 and Understated in 2024

What is the effect of the error on net income in 2023 and 2024?

The net income is overstated in 2023 due to the overstatement of ending inventory. This leads to the cost of goods sold being understated and gross profit being overstated in 2023, resulting in the net income being overstated as well.

In 2024, the overstated ending inventory from the previous year will carry over. If the error is not corrected, it will cause the cost of goods sold to be overstated and the gross profit to be understated in 2024, leading to the net income being understated.

Therefore, the effect of the error on net income is that it is overstated in 2023 and understated in 2024.

Final Answer: Understanding the Impact

Overstating the ending inventory in a given year leads to an overstatement of net income in that year due to understated cost of goods sold. However, this error reverses in the following year, causing the net income to be understated due to an inflated cost of goods sold.

When the ending inventory is overstated in 2023, the net income of that year would also be overstated. This is because the cost of goods sold (COGS) would be understated, leading to a higher net income. However, in 2024, the error would reverse due to the inflated COGS resulting in a lower net income.

If the ending inventory is overstated in 2023, what is the effect on net income in 2023 and 2024?

The effect of the error on net income is that it is overstated in 2023 and understated in 2024.