Question

An overstatement of ending inventory at the end of the current period will cause an overstatement of assets and an understatement of stockholders' equity on the current period's balance sheet. True or false?

Answer 1

Answer:

False

Explanation:

The change in inventory balance in a period is usually due to purchases and sales. The period opening and closing balances are connected as such;

Opening balance + purchases - cost of goods sold = ending balance

Hence overstating the ending balance results in an understatement of cost of goods sold thereby resulting in an overstatement of net income and retained earning.

The retained earnings is a component of the stockholder's equity hence it is overstated as well. Inventory is an asset, so overstating it is equivalent to overstating the assets balance.