Question

A company understated its ending inventory balance by $5,000 in 2018. What impact will this error have on cost of goods sold and gross profit in 2018 and 2019, assuming no other errors are made in either year?

Answer 1

Answer:

COGS overstated for 5,000

Explanation:

The COGS will be overstated  for the same ammount, that is because of the inventory identity.

$Beginning Inventory + Purchase = Ending Inventory + COGS$

If ending Inventory has a problem, it will be transferred to COGS as well to equalize the formula

If ending Inventory is understated it means their alue is less than it's real value,

$Beginning Inventory + Purchase \neq Ending Inventory (Real Inventory - Understimation) + COGS$

so to balance the formula COGS need to be overstated.

$Beginning Inventory + Purchase = Ending Inventory (Real Inventory - Understimation) + COGS(Real COGS + EI error)$