If a company understates its ending balance of inventory in year 1 and it records inventory correctly in year 2,which one of the following is true?

Question

Quizplus · Accepted Answer

If the company understates its ending balance of inventory in year 1, it would result in an understatement of cost of goods sold and an overstatement of net income in year 1. When the company records inventory correctly in year 2, it would result in a higher cost of goods sold and a lower net income in year 2. Therefore, the correct answer is that cost of goods sold is understated in year 2.

If a Company Understates Its Ending Balance of Inventory in Year