Question

A material overstatement in ending inventory was discovered after the year-end financial statements of a company were issued to the public. What effect did this error have on the year-end financial statements

Answer 1

Current assets to be overstated and gross profit to be overstated.

Step-by-step explanation:

Inventory is the product that is sold by a business to generate profits. They are purchased and sold out to customers within a given period.

If inventory is overstated it means that cost of goods sold is understated. This will inflate the profit of the business in financial statements.

Cost of goods sold = Starting inventory + Purchases - Ending Inventory

If ending inventory is overstated it will reduce cost of goods sold.

Also as inventory is a current asset of the business that can be sold within a short time, an overstatement of inventory is an overstatement of current assets.