Question

On December 31 of the current year, Aztec Company understated ending Merchandise Inventory by $10,000. How does this error affect the Cost of Goods Sold and the Net Income for the current year?

Answer 1

Answer:

Cost of goods sold will be overstated by $10,000

Net income will be understated by $10,000

Explanation:

The movements in inventory account can be shown as

Opening balance + purchases - cost of goods sold = ending balance

As such, understating the ending balance would result in an overstatement of cost of goods sold. This will in turn result in an understatement of gross and net income.