During its first and second years of operations, Explorer Company, a corporation using a periodic inventory system, made undiscovered errors in taking its year-end inventories that understated Year 1 ending inventory by $120,000 and overstated Year 2 ending inventory by $165,000. The combined effect of these errors on reported income is: Select one: A. Year 1 Year 2 Year 3 Understated Overstated Not affected $120,000 $45,000 ---   B. Year 1 Year 2 Year 3 Understated Overstated Not affected $120,000 $165,000 ---   C. Year 1 Year 2 Year 3 Understated Overstated Understated $120,000 $285,000 $165,000   D. Year 1 Year 2 Year 3 Overstated Understated Overstated $80,000 $165,000 $45,000

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A: Option A is the correct answer

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A:

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.