Asked by Caleb Glenney on Jul 13, 2024
Verified
What is the impact on cost of goods sold, gross profit, net income before taxes and retained earnings, respectively, if inventory is understated?
A) overstated; understated; understated; understated.
B) understated; overstated; understated; overstated.
C) overstated; understated; overstated; overstated.
D) understated; overstated; overstated; overstated.
Gross Profit
the difference between revenue and the cost of goods sold before deducting overhead, payroll, taxation, and interest payments.
Cost Of Goods Sold
The immediate expenses directly related to creating a company's sold products, covering both labor and materials costs.
- Analyze how inventory errors affect financial statements and understand the correction methods.
Verified Answer
BS
Brian ShomaliJul 14, 2024
Final Answer :
A
Explanation :
When inventory is understated, the cost of goods sold (COGS) is overstated because the ending inventory is part of the COGS calculation. This leads to an understatement of gross profit, net income before taxes, and retained earnings, as all these figures are directly affected by the COGS.
Learning Objectives
- Analyze how inventory errors affect financial statements and understand the correction methods.