An understatement of the beginning inventory balance will understate cost of goods sold and overstate net income.

Question

Quizplus · Accepted Answer

This is because beginning inventory represents the cost of goods that were available for sale during the period. By understating the beginning inventory balance, a portion of these costs will be shifted to the following period, resulting in a lower cost of goods sold and higher net income for the current period. This effect is reversed in the following period when the understated beginning inventory is corrected, resulting in a higher cost of goods sold and lower net income.

An Understatement of the Beginning Inventory Balance Will Understate Cost