Question

Inventory errors self-correct over two years. How is this so?

Answer 1

Inventory errors include overstatement or understatement of the value of the inventory in the balance sheet. They tend to self correct themselves as the closing inventory of one year becomes the opening inventory of the other year and in this way, it affects the income accordingly and reset themselves.

For example - if in one year, value of closing inventory is overstated, it will results in high income too. Now, in the second year, closing inventory will become the opening inventory and now, in this year, it will understate the income with the same amount, thus, self correcting the error caused by it. In this way, misstatement of inventory value self corrects itself over a period of two years.