If Dogs R Us overstates ending inventory on the balance sheet, then total equity on the balance sheet will be overstated as well.True false question.TrueFalse

Understanding the Concept

1. Impact of Ending Inventory on Financial Statements: Ending inventory is a component of current assets on the balance sheet. It represents the value of unsold goods at the end of the period.

2. Basis of Overstatement: If a company (like Dogs R Us) overstates its ending inventory, it implies that the reported value of inventory is higher than the actual value.

3. Effect on Cost of Goods Sold (COGS): An overstatement of ending inventory leads to a lower calculation for COGS since COGS is computed as: $\text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}$ Thus, if ending inventory is overstated, COGS will be understated.

4. Net Income and Equity Relationship: With lower COGS, the net income is falsely inflated. Since net income affects retained earnings (part of total equity), it means that total equity will be overstated as well.

Conclusion

Thus, the statement is True. Overstating ending inventory results in an overstatement of total equity on the balance sheet.