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

When managing inventory, which of the following is a likely effect of overstating ending inventory on the financial statements?

Cost of goods sold will be overstated.

Net income will be overstated.

Total assets will be understated.

Gross profit will be understated.

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Verified step by step guidance

Understand the relationship between ending inventory and cost of goods sold (COGS). Ending inventory is part of the formula used to calculate COGS: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \). If ending inventory is overstated, COGS will be understated.

Recognize the impact of understated COGS on gross profit. Gross profit is calculated as \( \text{Gross Profit} = \text{Sales Revenue} - \text{COGS} \). If COGS is understated, gross profit will be overstated.

Understand how gross profit affects net income. Net income is calculated as \( \text{Net Income} = \text{Gross Profit} - \text{Operating Expenses} \). If gross profit is overstated, net income will also be overstated.

Consider the effect on total assets. Ending inventory is reported as an asset on the balance sheet. If ending inventory is overstated, total assets will also be overstated.

Review the options provided in the problem and identify the correct effect based on the analysis above. The correct answer is that net income will be overstated due to the chain reaction caused by overstating ending inventory.