An error in the physical count of goods on hand at the end of the current period resulted in a $2,500 overstatement of the ending inventory. The effect of this error in the current period is to:
A) overstate cost of goods sold.
B) understate cost of goods available for sale.
C) understate gross profit.
D) overstate net income.

Question

Quizplus · Accepted Answer

An overstatement of the ending inventory results in an understatement of the cost of goods sold (since ending inventory is subtracted in the calculation of cost of goods sold). This, in turn, leads to an overstatement of gross profit and thus an overstatement of net income, because less cost of goods sold means higher gross profit if sales remain constant. Choices A, B, and C are incorrect effects of overstating ending inventory.

An Error in the Physical Count of Goods on Hand