Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Inventory Errors

Financial Accounting

5. Inventory

Inventory Errors

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Multiple Choice

The understatement of the beginning inventory balance causes:

An overstatement of cost of goods sold and an understatement of net income

No effect on cost of goods sold or net income

An understatement of cost of goods sold and an overstatement of net income

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Verified step by step guidance

Understand the relationship between inventory and cost of goods sold (COGS): Beginning inventory is part of the formula used to calculate COGS. The formula is:

COGS = Beginning Inventory + Purchases - Ending Inventory

. If beginning inventory is understated, it directly impacts the calculation of COGS.

Analyze the impact of an understated beginning inventory on COGS: If the beginning inventory is understated, the total COGS will be lower than it should be because the starting point of the calculation is reduced.

Understand the relationship between COGS and net income: Net income is calculated as

Net Income = Revenue - COGS - Expenses

. If COGS is understated, net income will be overstated because less expense is deducted from revenue.

Connect the concepts: An understated beginning inventory leads to an understated COGS, which in turn causes an overstated net income. This is because the lower COGS inflates the profit margin.

Summarize the correct answer: The correct answer is 'An understatement of cost of goods sold and an overstatement of net income,' as the understated beginning inventory reduces COGS and increases net income.