Which of the following describes the result if an organization records merchandise as a purchase, but fails to include it in the closing inventory count?
Which of the following describes the result if an organization records merchandise as a purchase, but fails to include it in the closing inventory count?
If an organization records merchandise as a purchase but fails to include it in the closing inventory count, the cost of goods sold (COGS) for the period will be overstated. This is because the inventory that was supposed to remain in the ending inventory is incorrectly treated as if it had been sold. Since the closing inventory is deducted in the COGS calculation, an understated closing inventory means a higher COGS.
Net income is affected by operating expenses and COGS. Overstating COGS would understating operating income but not net income. Thus only one answer is correct.
I agree with Doris
The direct impact is on the COGS and Gross Profit and by extension Net Profit. In the absence of Gross Profit in the answer options, the most appropriate answer will be the one revolving around COGS.
yeah, i agree with Doris. Net income is not affected in this case.
I agree with Iapayne2. Both b and c are correct answers.
If inventory is understated then COGS will be overstated and Net Income is understated. How is the answered determined to be about COGS and not Net Income when both answers are correct?