Overstating ending inventory has the following effect on cost of goods sold and net income respectively.
A) COGS - overstated and NI - overstated
B) COGS - understated and NI - overstated
C) COGS - overstated and NI - understated
D) COGS - no effect and NI - understated

Question

Quizplus · Accepted Answer

When ending inventory is overstated, the cost of goods sold (COGS) is understated because the ending inventory is subtracted from the cost of goods available for sale to calculate COGS. This understatement of COGS leads to an overstatement of net income, as lower COGS increases gross profit and, consequently, net income.

Overstating Ending Inventory Has the Following Effect on Cost of Goods