If the inventory account at the end of the year is understated, the effect will be to
A)overstate the gross profit on sales.
B)understate the net purchases.
C)overstate the cost of goods sold.
D)overstate the goods available for sale.

Question

Quizplus · Accepted Answer

If the inventory account at the end of the year is understated, it means that some of the inventory that was sold during the year was not recorded in the inventory account. This will cause a lower cost of goods sold to be reported, which will in turn overstate the gross profit on sales. Therefore, option A is incorrect. Additionally, because the cost of goods sold is understated, the goods available for sale will also be understated. Therefore, option D is incorrect. Option B is also incorrect as the net purchases are not affected by the inventory account being understated. The correct answer is option C, which correctly states that the cost of goods sold will be overstated if the inventory account is understated.

If the Inventory Account at the End of the Year