An overstatement of the 2018 ending inventory results in an understatement of net income during 2019.

Question

Quizplus · Accepted Answer

Overstating the ending inventory in 2018 would result in higher cost of goods sold (COGS) in 2019, which would in turn lower net income. This is because COGS is subtracted from revenue to determine gross profit, and then expenses are subtracted from gross profit to arrive at net income. Therefore, if COGS is overstated, gross profit and net income will be understated.

An Overstatement of the 2018 Ending Inventory Results in an Understatement