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

Question

Quizplus · Accepted Answer

When the inventory account is understated, it means that the cost of goods sold is overstated. This is because the calculation of cost of goods sold involves subtracting the ending inventory from the cost of goods available for sale. If the ending inventory is understated, the cost of goods sold will be overstated. As a result, the gross profit on sales will be understated since it is calculated by subtracting the cost of goods sold from the net sales.

If the Inventory Account at the End of the Year