Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,000, and its ending inventory on December 31 was understated by $17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000 purchase. None of these errors were discovered until the next year. As a result, Prunedale's cost of goods sold for this year was:

Question

Quizplus · Accepted Answer

The understatement of beginning inventory and ending inventory results in an understatement of cost of goods sold, since the formula for calculating cost of goods sold is:

Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold

If both beginning and ending inventory are understated, the difference between the two will also be understated, resulting in an understatement of cost of goods sold.

The incorrect recording of a purchase does not affect cost of goods sold for the current year, as it only affects inventory and accounts payable. Therefore, the cost of goods sold for the year is understated by the total amount of inventory understatement, which is $30,000 + $17,000 = $47,000. However, this understatement is offset by the $2,000 overstatement of the purchase, resulting in a net understatement of cost of goods sold of $47,000 - $2,000 = $45,000. Therefore, the correct answer is C, understated by $31,000.