CFA Practice Question

There are 520 practice questions for this study session.

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
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