Overstating the ending inventory will result in understating the cost of goods sold and overstating profits.

Question

Quizplus · Accepted Answer

Overstating the ending inventory will decrease the cost of goods sold (since less inventory is considered "sold"), which in turn will increase profits. However, this overstatement of profits is corrected when the inventory is eventually sold, as the cost of goods sold will then accurately reflect the actual cost of the goods sold. Therefore, overstating the ending inventory does lead to understating the cost of goods sold and overstating profits.

Overstating the Ending Inventory Will Result in Understating the Cost