Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,000, and its ending inventory on December 31 was understated by $17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000 purchase. None of these errors were discovered until the following year. As a result, Prunedale's cost of goods sold for this year was:
A)Overstated by $31,000.
B)Overstated by $5,000.
C)Understated by $31,000.
D)Understated by $48,000.Understatement of beginning inventory understates ( ) cost of goods sold and the understatement of ending inventory overstates (+) cost of goods sold.Also, the understatement of purchases understates ( ) cost of goods sold: $30,000 + 17,000 18,000 ($20,000 2,000) = $31,000 understatement of cost of goods sold

Question

Quizplus · Accepted Answer

The understatement of beginning inventory and ending inventory both result in an understatement of cost of goods sold. The understatement of purchases also results in an understatement of cost of goods sold. Therefore, the total understatement of cost of goods sold is $30,000 + $17,000 + ($20,000 - $2,000) = $31,000. So, the correct answer is option C, which indicates that the cost of goods sold is understated by $31,000.