Response to the following questions:
1. A company takes a physical count of inventory at the end of 2010 and finds that ending inventory is understated by $10,000. Would this error cause cost of goods sold to be overstated or understated in 2010? In year 2011? If so, by how much?
2. Describe how costs flow from inventory to cost of goods sold for the following methods: (a) FIFO and (b) LIFO.
3. Where is the amount of merchandise inventory disclosed in the financial statements?