An understatement of year 1's beginning inventory will
A)cause year 2's gross margin to be overstated.
B)cause year 1's cost of goods sold to be understated.
C)cause year 2's gross margin to be understated.
D)have no effect on year 1's gross margin.

Question

Quizplus · Accepted Answer

Beginning inventory is a component of cost of goods sold. If year 1's beginning inventory is understated, it will cause the cost of goods sold to be understated as well. This will result in a higher gross margin for year 1. However, in year 2, the understatement of beginning inventory will be corrected and it will lead to a higher cost of goods sold and lower gross margin.

An Understatement of Year 1's Beginning Inventory Will