Chapter 5, Problem 5.35P

Problem 5.35

LO 7

Effects of inventory errors

1. If the beginning balance of the Inventory account and the cost of items purchased or made during the period are correct, but an error resulted in overstating the firm’s ending inventory balance by $15,000, how would the firm’s cost of goods sold be affected? Explain your answer by drawing T-accounts for the Inventory and Cost of Goods Sold accounts and entering amounts that illustrate the difference between correctly stating and overstating the ending inventory balance.
2. If management wanted to understate profits, would ending inventory be understated or overstated? Explain your answer.