Make Money Company Inc. had beginning inventory of $25,200, purchases of $87,600, ending inventory of $29,100, sales of $153,000, operating expenses of $30,000, and a tax rate of 40% for 2012. An accounting clerk input the ending inventory as $21,900. What is the effect on 2012 gross profit?

Question

Quizplus · Accepted Answer

The correct ending inventory amount should be $29,100 instead of $21,900. This means that the ending inventory was understated by $7,200 ($29,100 - $21,900).

Since gross profit is calculated as sales minus cost of goods sold (beginning inventory + purchases - ending inventory), the cost of goods sold will be overstated by $7,200 ($87,600 - $25,200 - $29,100 + $21,900).

Therefore, gross profit will be $7,200 lower ($153,000 - $87,600 + $25,200 + $29,100 - $21,900 - $30,000) due to the input error.