The understatement of the beginning inventory balance causes:
A) Cost of goods sold to be overstated and net income to be correct.
B) Cost of goods sold to be overstated and net income to be overstated.
C) Cost of goods sold to be understated and net income to be overstated.
D) Cost of goods sold to be understated and net income to be understated.
E) Cost of goods sold to be overstated and net income to be understated.

Question

Quizplus · Accepted Answer

If the beginning inventory balance is understated, it means that the cost of goods sold will be overstated because the cost of goods sold calculation will subtract a lower amount from the beginning inventory balance to determine the cost of goods sold. This will result in a lower net income because the cost of goods sold is higher, decreasing the gross profit and ultimately the net income. However, if the beginning inventory balance is overstated, the cost of goods sold will be understated, resulting in a higher net income than it should be.

The Understatement of the Beginning Inventory Balance Causes