Vintner Company's ending inventory is understated by $3,000. The effect of this error on the current year's cost of goods sold and net income, respectively, are:

Question

Quizplus · Accepted Answer

If ending inventory is understated, the cost of goods sold (COGS) will be overstated because COGS is calculated as beginning inventory plus purchases minus ending inventory. An understated ending inventory increases COGS. Consequently, net income will be understated because it is calculated as revenues minus expenses, including COGS. Higher COGS means lower net income.

Vintner Company's Ending Inventory Is Understated by $3,000