The understatement 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 understated, it means that more goods are being recorded as sold than actually were, which increases the cost of goods sold. Since the cost of goods sold is an expense, increasing it reduces the net income. Therefore, the cost of goods sold is overstated, and net income is understated.

The Understatement of the Ending Inventory Balance Causes