Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 161

A small chain of grocery stores made a reporting error and understated its ending inventory. What effect would this have on the income statement for the following year?

Answer options

• A. Net income would be understated
• B. Net income would not be affected
• C. Net income would be overstated
• D. Net income would be negative

Correct answer: A

Explanation

Understating the ending inventory leads to a higher cost of goods sold, which in turn reduces net income for the following year. Therefore, net income would be understated. The other options are incorrect as they do not accurately reflect the financial implications of the inventory error.