Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2016,but the inventory was excluded in error during the ending inventory count.What impact will this have on fiscal 2016 financial reporting?
A)Gross margin is overstated.
B)Cost of sales is overstated by $1,000.
C)Ending inventory is overstated by $1,000.
D)Cost of goods available for sale is overstated by $1,000.

Question

Quizplus · Accepted Answer

Since the inventory was excluded from the ending inventory count, the cost of goods sold (COGS) will be understated by the value of the inventory not counted. If COGS is understated, it implies that the cost of sales will be overstated by the same amount, which in this case is $1,000. This error will result in an overstatement of gross margin since the cost of sales was overstated. The ending inventory will also be understated by the same amount, but this will impact the balance sheet and not the income statement. The cost of goods available for sale will not be affected since the purchase invoice was appropriately recorded.

Assume That a Purchase Invoice for $1,000 Was Appropriately Recorded