Pharoah Company reported the following amounts for its cost of goods sold and ending inventory:

		2021		2020
Cost of goods sold		$195,000		$200,000
Ending inventory		30,000		30,000

Pharoah made two errors: (1) 2020 ending inventory was overstated by $5,500, and (2) 2021 ending inventory was understated by $4,000.

Describe the impact of the errors on profit for 2020 and 2021 and on owner’s equity at the end of 2020 and 2021.
In 2020 profit is select an option: (overstated/understated )by $enter a dollar amount , the amount of the error in ending inventory. This error flows through to owner’s equity in 2020 to produce an select an option: understatement/overstatement of $enter a dollar amount .

In 2021 both errors have an impact. The net effect is an select an option: understatement/overstatement of profit by $enter a dollar amount . This is a result of the $5,500 select an option overstatement/understatement of the beginning inventory plus $enter a dollar amount , select an option understatement/overstatement of ending inventory.

Owner’s equity in 2021 would show only an select an option :understatement/overstatement of $enter a dollar amount . The $5,500 select an option : understatement/overstatement of 2020 would be offset by the $5,500 select an option :overstatement/understatement in profit caused by the impact on beginning inventory in 2021.