At the end of 20A, a $2,500 understatement was discovered in the amount of the 20A ending inventory as reflected in the perpetual inventory records. What were the 20A effects of the $2,500 inventory error (before correction)?
A) Cost of goods sold was understated by $2,500 and pretax profit was understated by $2,500.
B) Cost of goods sold was overstated by $2,500 and pretax profit was overstated by $2,500.
C) Assets (inventory) were understated by $2,500 and pretax profit was overstated by $2,500.
D) Assets (inventory) were understated by $2,500 and pretax profit was understated by $2,500.

Question

Quizplus · Accepted Answer

An understatement in ending inventory causes assets to be understated and cost of goods sold to be overstated, leading to an understatement in pretax profit.

At the End of 20A, a $2,500 Understatement Was Discovered