Effects of inventory error Assume that the ending inventory of a merchandising firm is overstated by $40,000.

a. By how much and in what direction (overstated or understated) will the firms cost of goods sold be misstated?

b. If this error is not corrected, what effect will it have on the subsequent periods operating income?

c. If this error is not corrected, what effect will it have on the total operating income of the two periods (the period in which there is an error and the subse- quent period) combined?