If beginning inventory is understated by $10 000, the effect of this error in the current period is: Group of answer choices Cost of Sales Understated; Profit Understated Cost of Sales Overstated; Profit Overstated Cost of Sales Understated; Profit Overstated Cost of Sales Overstated; Profit Understated
Question
If beginning inventory is understated by $10 000, the effect of this error in the current period is: Group of answer choices
Cost of Sales Understated; Profit Understated
Cost of Sales Overstated; Profit Overstated
Cost of Sales Understated; Profit Overstated
Cost of Sales Overstated; Profit Understated
Solution
If beginning inventory is understated by $10,000, the effect of this error in the current period is:
Cost of Sales Overstated; Profit Understated
Here's why:
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The cost of goods sold (COGS) is calculated as Beginning Inventory + Purchases - Ending Inventory. If the beginning inventory is understated, it means that the COGS will be lower than it should be.
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However, because COGS is an expense, and it's subtracted when calculating profit, a lower COGS would mean a higher profit.
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But in this case, because the beginning inventory is understated, the COGS is actually higher (overstated) than it should be.
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Therefore, because the COGS is higher, the profit will be lower (understated) than it should be.
So, the effect of understating the beginning inventory by $10,000 in the current period is that the cost of sales is overstated and the profit is understated.
Similar Questions
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