Hudson, Inc. is a calendar-year corporation. Its financial statements for the years 2015 and 2014 contained errors as follows:

2015 2014

Ending inventory $6,000 overstated $16,000 overstated

Depreciation expense $4,000 understated $12,000 overstated

Assume that no correcting entries were made at December 31, 2014, or December 31, 2015 and that no additional errors occurred in 2016. Ignoring income taxes, by how much will working capital at December 31, 2016 be overstated or understated?

The multiple choices are:

a. $0

b. $ 4,000 overstated

c. $ 4,000 understated

d. $10,000 understated

The correct option is A,$0

Explanation:

Working capital in the resources used in running the business on day to day basis.

It is more of an operational capital in the business such as the cash, inventory and some other liquid resources.

The formula for working is current assets minus current liabilities.

The working capital would not be impacted since understatement or overstatement in inventory in one year reverses in the second year.

The overstatement of ending inventory of $6,000 in 2014 would lead to understatement of closing inventory in 2015, while the overstatement in 2015 would be reversed in 2016.