The accountant for Sue Company made the following errors related to inventory in 2010: 1. The beginning inventory for $ 2010 \mathrm{was} $ overstated by $ \$ 375 $ due to an error in the physical count.
2. A $ \$ 650 $ purchase of merchandise on credit in 2010 was not recorded or included in the ending inventony.
Assuming a periodic inventory system, how would Sue's cost of goods sold, gross profit, and net income be affected in 2010 by these errors?
$\begin{array}{lll}&\text { Cost of Goods Sold }&\text { Gross Profit }&\text { Net Income }\\hline
I.&\text { Overstated } & \text { Understated } & \text { Understated } \
II.&\text { Overstated } & \text { Understated } & \text { No effect } \
III.&\text { Understated } & \text { Overstated } & \text { Overstated } \
IV.&\text { No effect } & \text { No effect } & \text { No effect }
\end{array}$

Question

The accountant for Sue Company made the following errors related to inventory in 2010: 1. The beginning inventory for $ 2010 \mathrm{was} $ overstated by $ \$ 375 $ due to an error in the physical count. 
2. A $ \$ 650 $ purchase of merchandise on credit in 2010 was not recorded or included in the ending inventony.
 Assuming a periodic inventory system, how would Sue's cost of goods sold, gross profit, and net income be affected in 2010 by these errors?
$\begin{array}{lll}&\text { Cost of Goods Sold }&\text { Gross Profit }&\text { Net Income }\\hline
I.&\text { Overstated } & \text { Understated } & \text { Understated } \
II.&\text { Overstated } & \text { Understated } & \text { No effect } \
III.&\text { Understated } & \text { Overstated } & \text { Overstated } \
IV.&\text { No effect } & \text { No effect } & \text { No effect }
\end{array}$

Quizplus · Accepted Answer

The beginning inventory being overstated increases the cost of goods sold, while not recording a purchase decreases the cost of goods sold. However, the net effect is an overstatement in cost of goods sold because the beginning inventory error is not offset by the purchase not recorded. This leads to gross profit and net income being understated.

The Accountant for Sue Company Made the Following Errors Related 2010was 2010 \mathrm{was} 2010was

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