Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2019 financial reporting?
A)Cost of goods sold is understated by $1,000.
B)Gross margin is overstated by $1,000.
C)Ending inventory is understated by $1,000.
D)Net income is overstated by $1,000.

Question

Quizplus · Accepted Answer

Since the inventory was excluded by error, it means the ending inventory will be understated by $1,000. This will result in an understatement of the Cost of Goods Sold (COGS) by $1,000 as well. However, since COGS is subtracted from revenue to calculate Gross Margin, it will not be impacted by this error. Similarly, Net Income is calculated after deducting all expenses, including COGS, so it will be impacted by this error.

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