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 2020 financial reporting?
A)Gross margin is understated by $1,000.
B)Cost of goods available for sale is overstated by $1,000.
C)Cost of sales is understated by $1,000.
D)Beginning inventory is overstated by $1,000.

Question

Quizplus · Accepted Answer

Since inventory was excluded in error during the ending inventory count, this means that the value of the inventory at the end of fiscal 2019 was understated by $1,000. Therefore, the cost of sales for fiscal 2019 was also understated by $1,000, which in turn means that gross margin for the year was overstated by $1,000. When we move on to reporting for fiscal 2020, the understated cost of sales from the previous year will impact the beginning inventory for the current year. This means that beginning inventory for fiscal 2020 will be understated by $1,000, which will in turn lead to an understatement of cost of goods available for sale and an overstatement of gross margin for the current year if this error is not corrected.

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