If the Year 1 ending inventory is either Understated or Overstated, what is the effect on the current and following years Income Statement. [fill in Overstated or Understated]

_______ _Year 1_____________ _______ _Year 2_____________

Ending Inventory Cost of Goods Sold Net Income Cost of Goods Sold Net Income

1. Understated _______________ _________ _______________ __________

2. Overstated _______________ _________ _______________ __________

Explain in your own words why Year 2 Net Income in Scenario 2 is as you describe.