FAR Inventory Errors · Updated November 2026
Ending Inventory Is Overstated. What Happens to Net Income?
Use the cost-of-goods-sold formula instead of memorizing four separate error rules.
COGS formula
Beginning inventory plus purchases minus ending inventory equals cost of goods sold.
Ending inventory errors
Overstated ending inventory understates COGS and overstates net income. Understated ending inventory does the opposite.
Beginning inventory errors
Overstated beginning inventory overstates COGS and understates net income. Understated beginning inventory does the opposite.
Two-year effect
An ending-inventory error becomes the next year's beginning-inventory error, so the income effect can reverse when no additional errors occur.
The takeaway
Ending inventory moves opposite COGS. Beginning inventory moves with COGS.
Related Summit guides
FAQ
Does overstated ending inventory overstate income?
Yes.
Why can the error reverse next year?
The incorrect ending balance becomes next year's beginning inventory.
Does reversal make the first-year statements correct?
No.