When the reserve for inventory obsolescence is understated, cost of goods sold expense is understated and net income is also overstated.

Question

Quizplus · Accepted Answer

When the reserve for inventory obsolescence is understated, it means that the company has not set aside enough funds to cover the potential cost of obsolete inventory. This results in cost of goods sold expense being understated because the company is not accounting for the full cost of the inventory sold. As a result, the net income is also overstated because the expenses are lower than they should be.

When the Reserve for Inventory Obsolescence Is Understated, Cost of Goods