Khan Limited uses a periodic inventory system and has a December 31 year end. On December 30, 2020, Khan received an $8,000 shipment of merchandise inventory. The merchandise was correctly included in the December 31, 2020 ending inventory, but was incorrectly omitted from the 2020 purchases. The invoice for the merchandise was received and processed on January 15, 2021, and the merchandise was incorrectly included in the 2021 purchases. A second inventory error subsequently discovered was that $3,000 of merchandise had inadvertently been omitted from the December 31, 2020 ending inventory.

For each of the financial statement items in parts (a) through (f), indicate the combined impact the two errors will have for the years 2020 and 2021. State whether the errors will have no effect (NE), or the dollar amount of the overstatement (O) or understatement (U). Current assets December 31 Accounts payable December 31 Cost of goods sold Retained earnings December 31 Net income Cash flow from operations

Example 2020 2021 x. Item $4,000 U NE

Hello, I am having a hard time understanding overstatement/.understatement of inventory errors. Could you help me to understand what to do when I see these types of questions on exams? Thanks a lot