Chapter 6, Problem 20QS

To determine

Effect of under-valuation of inventory on the various financial items: Where Inventory valuation is understated then this will effect the various financial items. The Under-valuation of Inventory will have an effect on the gross profit of current year, cost of goods sold of the current year, net income of the current year and later years.

With the Under-statement of inventory, the cost of goods sold shall be overstated and income of the current year get under-stated. However, the ending inventory of the current year will be the beginning inventory of the next year, which will have corresponding reverse effect of it on the next year cost of goods sold and net income of the next year.

To determine: The effect of Under-valuation of ending inventory on the incomes and cost of goods sold of the current year and next year.