 Inventory errors affect the computation of costs of goods sold and net income and cause either an overstatement or understatement of net income. This is most easily observable when we review the costs of goods sold model. An overstatement of ending inventory would cause costs of goods sold to be too low and therefore net income would be too high. The two most common causes of inventory errors are failure to count or price inventory correctly and not properly recognizing the transfer of legal title in goods and transit. This second issue relates to FOB shipping point and FOB destination transactions. Inventory errors are often self-correcting, meaning an error in ending inventory of a current period will have a reverse effect on net income in the next accounting period. So over two years, the total net income is correct because the errors offset each other. In this example, we have two years, 2015 and 2016. In 2015, ending inventory is overstated by $5,000 and reported as $20,000 instead of $15,000. This causes net income to be overstated by $5,000 and reported as $30,000 instead of $25,000. The reason inventory errors reverse is because the ending inventory in one year becomes the beginning inventory in the next year. In this case, the 2015 overstated ending inventory becomes 2016's overstated beginning inventory. So now, 2016 goods available for sale are overstated by $5,000. Assuming a correct inventory account in 2016, costs of goods sold is now overstated by $5,000, which means net income is now understated by $5,000 in 2016. The $5,000 error reverses itself.