Ending Inventory Understated-year 2
The 2010 under stated ending inventory becomes the 2011 understated beginning inventory. We see in Exhibit 6.11 that this error causes an under statement in 2011 cost of goods sold and a $4000 over statement in both gross profit and net income for 2011.
Ending inventory Understated-year3
Exhibit 6.11 shows that the 2010 ending inventory error affects only that period and the next. It does not affect 2012 results or any period there after. An inventory error is said to be self-correcting because it always yields an offsetting error in the next period. This does not reduce the severity of inventory errors. Managers, lenders,owners, and others make important decision from analysis of income and costs.