If the beginning inventory for the current year is overstated by 5,000 and the ending inventory is overstated by 12,000, how will these inventory errors impact the net income for the year?

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Net income will be overstated by 17,000.Net income will be understated by 12,000.Net income will be overstated by 7,000.Net income will be understated by 7,000.There will be no effect on net income.

Explanation

An overstatement of ending inventory increases reported profit, while an overstatement of beginning inventory decreases it. Here, the overstatement of ending inventory by 12,000 inflates profit, and the overstatement of beginning inventory by 5,000 reduces profit. The net effect is an overstatement of net income by 12,000 minus 5,000, which equals 7,000.