Explain how errors in ending inventory affect statements of earnings and statements of financial position.

- Inventory errors can arise for a number of reasons, including incorrect counts of inventory, mistakes in costing, and errors in identifying items.

- Because the ending inventory of one period is the beginning inventory of the next period, an error in the measurement of ending inventory will affect the cost of goods sold and net income of two consecutive periods.

- Inventory errors are self-correcting; therefore, the assets and shareholders' equity of only the first period are misstated (assuming no other errors are made).