Respuesta :
Because this is directly related to the cost of goods sold, an overestimate of ending inventory will result in an overestimate of net income. The revenue is divided by the cost of goods sold to arrive at the income.
What will happen if ending inventory is overstated at the end of Year 1?
The beginning inventory of the following period will also be overstated if the current period's inventory is overstated. Since the cost of goods sold will also be overstated as a result of the overestimated beginning inventory, the subsequent period's net income will be understated.
What is the effect of ending inventory that is overstated?
The amount of inventory that would have otherwise been added to the cost of goods sold during the period is reduced when ending inventory is overstated. As a result, the current reporting period's cost of goods sold expense decreases.
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