In a periodic inventory system, if ending inventory is understated,
A) net income is understated.
B) working capital is overstated.
C) the current ratio is overstated.
D) cost of goods sold is understated.

Question

Quizplus · Accepted Answer

When ending inventory is understated in a periodic inventory system, the cost of goods sold (COGS) is overstated because COGS is calculated as Beginning Inventory + Purchases - Ending Inventory. An overstated COGS leads to an understated gross profit and, consequently, an understated net income.

In a Periodic Inventory System, If Ending Inventory Is Understated