ABC, Inc. is a calendar-year corporation. Its financial statements for the years 2021 and 2020 contained errors as follows: 2021 2020

Ending inventory $9,000 overstated $24,000 overstated

Depreciation expense $6,000 understated $18,000 overstated

Assume that the proper correcting entries were made at December 31, 2020. By how much will 2021 income before taxes be overstated or understated?

A) $15,000 overstated B) $ 3,000 understated

C) $ 6,000 overstated D) $ 3,000 overstated

A) $15,000 overstated

Explanation:

Ending Inventory is subtracted from Cost of Goods sold so an overstated Ending Inventory would mean a smaller Cost of Goods sold and hence an overstated Income.

An Understated Depreciation amount would have the same effect because Depreciation is an expense so understating it would mean less expenses subtracted from Income leading to an overstated income.

As both of them will overstate income, the total overstatement would be;

= 9,000 + 6,000

= $15,000

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