If the ending inventory is overstated in year 1, it means that the cost of goods sold (COGS) is understated. This is because the cost of goods available for sale is divided between the cost of goods sold and the ending inventory. If more cost is allocated to the ending inventory, less is allocated to the cost of goods sold. Therefore, the correct answer is "Cost of goods sold in the current year, year 1, will be understated."

When the cost of goods sold is understated, it means that more profit is reported. This is because the cost of goods sold is subtracted from sales to calculate gross profit. If the cost of goods sold is less, the gross profit is more. Therefore, the correct answer is "Gross profit in the current year, year 1, will be overstated."

The net income is also overstated in year 1 because the gross profit is a component of net income. If the gross profit is overstated, the net income is also overstated.

In year 2, the error is reversed. The ending inventory of year 1 becomes the beginning inventory of year 2. If the beginning inventory is overstated, the cost of goods sold is overstated in year 2. Therefore, the correct answer is "Cost of goods sold in the following year, year 2, will be overstated."

When the cost of goods sold is overstated, the gross profit is understated in year 2. Therefore, the correct answer is "Gross profit in the next year, year 2, will be understated."

The net income is also understated in year 2 because the gross profit is a component of net income. If the gross profit is understated, the net income is also understated. Therefore, the correct answer is "Net income in the next year, year 2, will be understated."

Question

If the ending inventory is overstated in year 1, it means that the cost of goods sold (COGS) is understated. This is because the cost of goods available for sale is divided between the cost of goods sold and the ending inventory. If more cost is allocated to the ending inventory, less is allocated to the cost of goods sold. Therefore, the correct answer is "Cost of goods sold in the current year, year 1, will be understated."

When the cost of goods sold is understated, it means that more profit is reported. This is because the cost of goods sold is subtracted from sales to calculate gross profit. If the cost of goods sold is less, the gross profit is more. Therefore, the correct answer is "Gross profit in the current year, year 1, will be overstated."

The net income is also overstated in year 1 because the gross profit is a component of net income. If the gross profit is overstated, the net income is also overstated.

In year 2, the error is reversed. The ending inventory of year 1 becomes the beginning inventory of year 2. If the beginning inventory is overstated, the cost of goods sold is overstated in year 2. Therefore, the correct answer is "Cost of goods sold in the following year, year 2, will be overstated."

When the cost of goods sold is overstated, the gross profit is understated in year 2. Therefore, the correct answer is "Gross profit in the next year, year 2, will be understated."

The net income is also understated in year 2 because the gross profit is a component of net income. If the gross profit is understated, the net income is also understated. Therefore, the correct answer is "Net income in the next year, year 2, will be understated."

Knowee AI · Accepted Answer

If the ending inventory is overstated in year 1, it means that the cost of goods sold (COGS) is understated. This is because the cost of goods available for sale is divided between the cost of goods sold and the ending inventory. If more cost is allocated to the ending inventory, less is allocated to the cost of goods sold. Therefore, the correct answer is "Cost of goods sold in the current year, year 1, will be understated."

When the cost of goods sold is understated, it means that more profit is reported. This is because the cost of goods sold is subtracted from sales to calculate gross profit. If the cost of goods sold is less, the gross profit is more. Therefore, the correct answer is "Gross profit in the current year, year 1, will be overstated."

The net income is also overstated in year 1 because the gross profit is a component of net income. If the gross profit is overstated, the net income is also overstated.

In year 2, the error is reversed. The ending inventory of year 1 becomes the beginning inventory of year 2. If the beginning inventory is overstated, the cost of goods sold is overstated in year 2. Therefore, the correct answer is "Cost of goods sold in the following year, year 2, will be overstated."

When the cost of goods sold is overstated, the gross profit is understated in year 2. Therefore, the correct answer is "Gross profit in the next year, year 2, will be understated."

The net income is also understated in year 2 because the gross profit is a component of net income. If the gross profit is understated, the net income is also understated. Therefore, the correct answer is "Net income in the next year, year 2, will be understated."

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