Understating beginning inventory will understate
A) assets.
B) cost of goods sold.
C) net income.
D) owner's equity.

Question

Quizplus · Accepted Answer

Beginning inventory is a key component in calculating cost of goods sold (COGS). Understating beginning inventory will result in a lower COGS and therefore, a higher net income. This is because COGS is subtracted from revenue to calculate gross profit, and a lower COGS will result in a higher gross profit. Higher gross profit will increase net income, which is the amount of profit reported on the income statement. However, assets and owner's equity are not directly affected by understating beginning inventory.

Understating Beginning Inventory Will Understate