Impact of Inventory Errors
An error while recording the ending inventory in the current period has a reverse effect on the net income of the next period. For example: if a company understates their ending inventory, their beginning inventory for the next period will be understated while the net income for the next year will be overstated. If the inventory errors go uncorrected, by the time the two periods are over they will have offset each other. If a company has an error in the beginning inventory, it won’t have a corresponding error in the ending inventory. In order to have an accurate ending inventory, companies need to make sure they’re correctly recording the inventory at the balance sheet date.
Just about every company that deals with inventory experiences errors in their inventory records at one point or another. These errors can occur for a number of reasons, overlooking goods on hand, miscounting goods or simple mathematical errors are common. Your income statement will feel the effect of inventory errors if they go uncorrected.
Inventory errors affect two periods because the ending inventory of one period automatically becomes the beginning inventory of the next, this causes inventory errors to affect the calculation on the cost of goods sold. An error in the cost of goods sold leads to errors in how the gross profit and net income are calculated. Here are the effects of inventory erroes on the current year's income statements:
Financial statements depend on accurate information and it’s important that companies have a correct inventory balance at the end of each accounting period.