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Assume that due to an error during the count of its physical inventory, a company overstatedthe cost of itsending inventory at the end of 20X5. As a result of this error, indicate how each of the following items are affected on the company's 20X5 incomestatement and balance sheet.Its cost of goods sold for 20X5 will:be understated.Its ending retained earnings balance for 20X5 will:be overstated.Its net income for 20X5 will:be overstated.Feedback:Net income is closed to retained earnings. If net income is overstated, retained earnings will be leftoverstated

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Answer:

  1. Its cost of goods sold for 20X5 will: be understated. TRUE, since the ending inventory is overstated, the COGS will be understated (COGS = beginning inventory balance + manufactured goods - ending inventory)
  2. Its ending retained earnings balance for 20X5 will: be overstated. TRUE, since the COGS were understated, net income will be overstated, increasing the retained earnings balance.
  3. Its net income for 20X5 will: be overstated. TRUE, since the COGS were understated, net income will be overstated
  4. Net income is closed to retained earnings. If net income is overstated, retained earnings will be left overstated. TRUE, if net income is overstated, retained earnings will also be overstated.

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