When there is an error in the initial inventory, it as a consequence alters the ending inventory account for the same month. True False
The correct answer and explanation is:
The correct answer is True.
When an error is made in the initial inventory, it does indeed impact the ending inventory for the same accounting period. This is because the ending inventory is dependent on the accurate calculation of beginning inventory, purchases, and sales during the period. The formula for calculating ending inventory is:
Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold (COGS)
If the beginning inventory is recorded incorrectly, this error will carry through to the ending inventory. For example, if the beginning inventory is overstated, the ending inventory will also be overstated because the sales and purchases are calculated based on this incorrect starting point. On the other hand, if the beginning inventory is understated, the ending inventory will also be understated.
This effect can influence financial reporting. An overstatement of ending inventory leads to an overstatement of net income because the cost of goods sold is lower. Conversely, an understatement of ending inventory will cause an understatement of net income since the cost of goods sold will be higher.
Errors in the beginning inventory can also cause discrepancies in future periods. For instance, the overstatement or understatement of ending inventory will carry forward as the beginning inventory for the next accounting period. This error can continue to affect the financial statements until corrected.
In sum, an error in the initial inventory directly influences the ending inventory for the same period, and such mistakes can distort financial performance and tax reporting, requiring adjustments to ensure accuracy.