Question

If a company understates its count of ending inventory in Year 1, which of the following is true?-Costs of good sold is understated at the end of Year 1.-Profit is correct in Year 2.-The balance of retained earnings is overstated at the end of Year 1.-The balance of retained earnings is correct at the end of Year 2.

Answer 1

Answer:

Costs of good sold is understated at the end of Year 1

Explanation:

From the inventory formula:

$Beginning Inventory + Purchase = Ending Inventory + COGS$

An understatment means, something worth $10 is being valued at $8 so if the count is understate the Ending Inventory  in the books is lower that the real ending iventory

We could build the following formula

if ending is undestated we got that

$Beginning Inventory + Purchase = Ending Inventory_{book}( ending inventory_{REAL} - understament) + COGS$

Now because of this, COGS needs to make up for the lower ending inventory so it will be understated as well, by the same amount.