BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Overstate cost of goods sold and overstate gross profit and net income
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Understate cost of goods sold and understate gross profit and net income
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Overstate cost of goods sold and understate gross profit and net income
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Understate cost of goods sold and overstate gross profit and net income
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Detailed explanation-1: -Explanation: If the value of ending inventory is overstated then the cost of goods sold will be understated. Cost of goods sold is an expense on the income statement. If cost of goods sold is understated then net income will be overstated.
Detailed explanation-2: -If the ending inventory is overstated, cost of goods sold is understated, resulting in an overstatement of gross margin and net income. Also, overstatement of ending inventory causes current assets, total assets, and retained earnings to be overstated.
Detailed explanation-3: -Overstating inventory When inventories are overstated it lowers the COGS, because the excess stock in accounting records translates to higher closing stock and less COGS. When ending inventory is overstated it causes current assets, total assets, and retained earnings to also be overstated.
Detailed explanation-4: -The answer is overstated. In the calculation of cost of goods sold, beginning inventory is an addition. So, if it is understated, the cost of goods sold is understated, as well. An understated cost of goods sold will overstate net income.
Detailed explanation-5: -If a corporation overstates its inventory, it will affect the following reported amounts on the corporation’s income statement: Cost of goods sold will be too low. Gross profit will be too high. Operating income and net income will be too high.