Which of the following statements is false regarding inventory management?

• A. Inventory errors in one period do not affect the financial statements of subsequent periods.
• B. An understatement of beginning inventory will result in an overstatement of cost of goods sold.
• C. An overstatement of ending inventory will result in an overstatement of net income.
• D. Accurate inventory management is essential for proper financial reporting.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of inventory errors and their impact on financial statements. Inventory errors can affect multiple periods because the ending inventory of one period becomes the beginning inventory of the next period. This means errors can carry forward and impact subsequent financial statements.
2. Step 2: Analyze the relationship between beginning inventory, cost of goods sold (COGS), and net income. An understatement of beginning inventory reduces COGS, which increases net income. Conversely, an overstatement of beginning inventory increases COGS, reducing net income.
3. Step 3: Examine the impact of ending inventory errors. An overstatement of ending inventory reduces COGS, which increases net income. Conversely, an understatement of ending inventory increases COGS, reducing net income.
4. Step 4: Evaluate the importance of accurate inventory management. Proper inventory management ensures that financial statements reflect the true financial position and performance of the company, avoiding errors that could mislead stakeholders.
5. Step 5: Identify the false statement. Based on the analysis, the statement 'Inventory errors in one period do not affect the financial statements of subsequent periods' is false because inventory errors can carry forward and impact future periods.