An overstatement of the beginning inventory results in:Question 3Answera.an overstatement of profitb.an understatement of profitc.no effect on the period’s profitd.a need to adjust purchases
Question
An overstatement of the beginning inventory results in:Question 3Answera.an overstatement of profitb.an understatement of profitc.no effect on the period’s profitd.a need to adjust purchases
Solution
The correct answer is b. An overstatement of the beginning inventory results in an understatement of profit.
Here's why:
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If the beginning inventory is overstated, the cost of goods sold (COGS) will also be overstated. This is because COGS is calculated as: Beginning Inventory + Purchases - Ending Inventory.
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If COGS is overstated, this means that more costs are subtracted from sales when calculating the gross profit. Gross profit is calculated as: Sales - COGS.
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If the gross profit is lower, and all other expenses remain the same, the net profit (or the period's profit) will be understated. Net profit is calculated as: Gross Profit - Expenses.
Therefore, an overstatement of the beginning inventory results in an understatement of profit.
Similar Questions
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