Question

Explain the following statement: “Inventory errors correct themselves.”

Short answer

Inventory errors correct themselves becausethe ending inventory of the previous period is the same as the beginning inventory of the next period.

Step-by-step solution

Definition of Net Profit

Benefits generated by the business entity after adjusting all the expenses, i.e., direct and indirect, are known as net profit. Selling and administrative expenses are also deducted for calculating such profit.

Inventory Errors Correct Themselves

Any errors made in the inventory will affect the assets, gross profit, net profit, and cost of goods sold. The ending list of one period will be reported as the beginning inventory of the next period. Therefore, any error in ending inventory will affect the cost of goods sold, gross profit, net profit, and current assets of the next period. Consequently, such errors will get offset in the next period.