Question

what would be the effect on various accounts in 2016 if ending inventory in 2014 was understated

Answer 1

Net Income = Gross Profit - Operating Expenses

Gross Profit = Sales Revenue - Cost of Goods Sold

Cost of Goods Sold = Beginning Inventory + Purchase of Inventory or Cost of Goods Manufactured - Ending Inventory.

If the ending inventory in 2014 was understated, net income of 2014 was understated as the cost of goods sold was overstated.. The ending inventory of 2014 becomes the beginning inventory of 2015, and the effect would be the opposite. Since the beginning inventory of 2015 is understated, cost of goods sold of 2015 would be understated, and net income of 2015 would be overstated.

Since the error has corrected itself, there would be no effect on the various effects in 2016.