- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 25. Inventories
- Subject 6. Financial Analysis of Inventories
CFA Practice Question
In 2015, Patriot Corporation found that they overstated their inventory by $5,000 in 2013. How would this affect the company's net income in 2015? (Assume the tax rate of 40%)
A. It is overstated by $5,000.
B. It is understated by $5,000.
C. It is not affected.
Explanation: The effect of the error on net income in 2013 will be counterbalanced in 2014, leaving the net income of 2015 unaffected.
User Contributed Comments 7
| User | Comment |
|---|---|
| examinee | Since the error was figured in 2015 shouldn't the 2015 income statement take the hit? Why is 2014 even relevant? |
| johnsk | but the error happened in 2013 and in the subsequent year (2014) we should take action. Just the rule. |
| cbb1 | You can assume that ending inventory in 2014 is correct (because a physical inventory is taken each year). Thus, the offset to 2013 is adjusted in 2014. No affect thereafter. |
| ehc0791 | The error in 2013 is not discovered until year 2015. |
| dimanyc | i think all such errors affect beginning balance of Retained Earnings and not NI. So even if error was uncovered in 2014 it would still not impact NI of that year. |
| rana1970 | Overstated inventory of 5K in 2013 means the beg. inv. of 2014 was also overstated which overstated CGS & understated NI in 2014, leaving no effect on end. Inv. of 2014 which could cause problem in 2015. |
| berylzheng | CGS error in 2013 offset with CGS in 2014. Therefor no impact to 2015 |