Effects of inventory error
Response to the following problem:
Assume that the ending inventory of a merchandising firm is overstated by $40,000.
Required:
a. By how much and in what direction (overstated or understated) will the firm's cost of goods sold be misstated?
b. If this error is not corrected, what effect will it have on the subsequent period's operating income?
c. If this error is not corrected, what effect will it have on the total operating income of the two periods (the period in which there is an error and the subsequent period) combined?