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A company overstated its ending inventory balance by $6,000 in 2015. What impact will this error...

A company overstated its ending inventory balance by $6,000 in 2015. What impact will this error have on total assets and retained earnings in 2015 and 2016 (ignoring tax effects)?

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Answer #1

Ending inventory was overstated in 2015 by $6,000.

Due to overstated $6,000 ending inventory in 2015, cost of goods sold was understated by $6,000 and thus, net income and retained earnings were overstated by $6,000. Total assets were also overstated by $6,000 in 2015.

Ending inventory of 2015 will become beginning inventory of 2016. Due to overstated beginning inventory of $6,000 in 2016, cost of goods sold will be overstated and thus net income will be understated by $6,000. Retained earnings balance will get corrected in 2016. Total assets will not be effected in 2016.

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