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39) On December 31. Year 1, Owings Corporation overstates the ending inventory by $5,000. How will this affect the amount of
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Answer #1

overstating inventory means overstating its gross profit and net profits too as cost of goods sold is understated.

retained earning is residual income after payment of dividends if any.

hence due to overstated net income , retained earning of year 1 will also be overstated by $5000.

but for year 2, opening inventories will be high and ultimately cost of goods will be high too.

hence the effect of overstating the inventory in year 1 will be neutral.

hence retained earning amount in balance sheet will be correct at the end of year 2.

hence option A is correct.

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