ExpertMedium1 markMultiple Choice
CPA · Question 21 · Area II: Balance Sheet Accounts
During an audit, it was discovered that ending inventory was overstated by $30,000 in Year 1. What is the effect of this error on Year 1 Cost of Goods Sold (COGS) and Year 1 Net Income?
During an audit, it was discovered that ending inventory was overstated by $30,000 in Year 1. What is the effect of this error on Year 1 Cost of Goods Sold (COGS) and Year 1 Net Income?
Answer options:
A.
COGS Overstated; Net Income Understated
B.
COGS Understated; Net Income Overstated
C.
COGS Overstated; Net Income Overstated
D.
COGS Understated; Net Income Understated
How to approach this question
Use the COGS formula: Beg Inv + Purchases - End Inv = COGS. If End Inv is too high (overstated), the subtraction is too large, making COGS too low (understated). Low Expense = High Income.
Full Answer
B.COGS Understated; Net Income Overstated✓ Correct
B
COGS = Beg Inv + Purchases - End Inv.<br/>If End Inv is Overstated, COGS is Understated.<br/>Net Income = Sales - COGS.<br/>If COGS is Understated, Net Income is Overstated.
Common mistakes
Confusing the relationship between Inventory and COGS.
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