As a controller of a merchandising company, I could only prepare accurate income statements, statements of retained earnings, and balance sheets when the inventory was correctly valued. Since the cost of goods sold figure affects the companys net income, it also affects the balance of retained earnings on the statement of retained earnings. On the balance sheet, incorrect inventory amounts affect both the reported ending inventory and retained earnings. For these reasons it is important that inventories are reported correctly. However, I was often told that inventories correct themselves. Explain the following statement: Inventory errors correct themselves.