Financial statement effects of inventory Errors
Companies must take care in both taking a physical count of inventory and in assigning a cost to it. An inventory error causes misstatements in cost of good sold, gross profit, net income, current assets, and equity.It also cause misstatements in the next period's statements because ending inventory of one period is the beginning inventory of the next. As we consider the financial statement effects in this section, it is helpful if we recall the following inventory relation