If Period 1 ending inventory is overstated, then:
A)both cost of goods sold and net income are understated in Period 1.
B)cost of goods sold is overstated and net income is understated in Period 1.
C)cost of goods sold is understated and net income is overstated in Period 1.
D)both cost of goods sold and net income are overstated in Period 1.

Question

Quizplus · Accepted Answer

If Period 1 ending inventory is overstated, the cost of goods sold (COGS) will be understated because COGS is calculated as Beginning Inventory + Purchases - Ending Inventory. An overstated ending inventory reduces COGS, leading to an overstatement of net income since lower COGS increases gross profit and, consequently, net income.

If Period 1 Ending Inventory Is Overstated, Then