At the end of Year 1, ABC Inc.'s inventories were overstated by $10,000.At the end of Year 2 its inventories were overstated by $20,000.Assuming that ABC Inc.is subject to a 20% tax rate, the effect of these overstatements on the company's Year 2 Cost of Goods Sold would be an:

Question

Quizplus · Accepted Answer

The overstatement of inventories at the end of Year 1 would carry over to Year 2, causing the beginning inventory for Year 2 to be overstated. This overstatement would decrease the cost of goods sold (COGS) for Year 2. However, the additional overstatement of $20,000 at the end of Year 2 does not affect Year 2's COGS but will affect Year 3. Therefore, only the initial $10,000 overstatement affects Year 2's COGS, leading to an understatement of COGS by $10,000.

At the End of Year 1, ABC Inc