Phipps Corporation overstated its ending inventory on December 31,2015.Which of the following answers correctly identifies the effect of the error on 2016 financial statements?
A)Cost of goods sold is overstated.
B)Gross margin overstated.
C)Ending inventory is understated.
D)Net income is overstated.

Question

Quizplus · Accepted Answer

An overstatement of ending inventory in 2015 means that the beginning inventory for 2016 is overstated. This leads to an overstatement of the cost of goods sold in 2016, as beginning inventory is part of the cost of goods sold calculation.

Phipps Corporation Overstated Its Ending Inventory on December 31,2015