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Inventory misstatements have a direct impact
on the amount of reported net income.
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A misstatement (error, difference,etc.) in the
amount of ending inventory will cause the amount of net income for the
period to be misstated by the same amount and in the same direction.
| The amount of ending inventory
is, in effect, a credit or addition to the net income for the period.
Income is a credit; if we overstate ending inventory, we are overstating
a credit in the income statement, which adds to the amount of net income
for the period. |
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A misstatement (error, difference,etc.) in the
amount of beginning inventory will cause the amount of net income for the
period to be misstated by the same amount and in the opposite direction.
| The amount of beginning
inventory is, in effect, a debit or reduction to the net income for the
period. Income is a credit; if we overstate beginning inventory,
we are overstating a debit in the income statement, which reduces the amount
of net income for the period. |
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The ending inventory of one period will be the
beginning inventory of the next period. A misstatement in an ending
inventory amount will therefor affect the income statements of two periods.
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Errors in inventory are said to be self-correcting
errors in that, if not found, the misstatement in two periods will cuonter-balance
each other, resulting in no effect after the two periods are over.
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