The overstatement of the ending inventory balance causes:
A)Cost of goods sold to be overstated and net income to be understated.
B)Cost of goods sold to be overstated and net income to be overstated.
C)Cost of goods sold to be understated and net income to be understated.
D)Cost of goods sold to be understated and net income to be overstated.
E)Cost of goods sold to be overstated and net income to be correct.

Question

Quizplus · Accepted Answer

When ending inventory is overstated, the cost of goods sold (COGS) is understated because the ending inventory is subtracted from the cost of goods available for sale to calculate COGS. This, in turn, causes net income to be overstated because lower COGS increases gross profit and, consequently, net income.

The Overstatement of the Ending Inventory Balance Causes