At an organization that uses a periodic inventory system, the accountant accidentally understated the organization's beginning inventory. How would the accountant's accident impact the income statement?
At an organization that uses a periodic inventory system, the accountant accidentally understated the organization's beginning inventory. How would the accountant's accident impact the income statement?
In a periodic inventory system, the beginning inventory is a part of the calculation to determine the cost of goods sold (COGS). If the beginning inventory is understated, the calculated COGS will be understated because it would appear that fewer goods were sold than actually were. Since COGS is understated, the expense is lower than it should be, leading to an overstatement of net income. Therefore, the correct option is that the cost of goods sold will be understated and net income will be overstated.
A is the correct answer.
It's A. Per this article, an understatement of the Beginning Inventory will result in an understated COGS and overstated Net Income: https://opentextbc.ca/principlesofaccountingv1openstax/chapter/explain-and-demonstrate-the-impact-of-inventory-valuation-errors-on-the-income-statement-and-balance-sheet/#:~:text=Inventory%20errors%20at%20the%20beginning%20of%20a%20reporting,cost%20of%20goods%20sold%20and%20overstated%20net%20income.
If the cost of goods sold will be understated how come there will be no impact on the net income? The net income will be overstated.
It's B
It would be B if it was the Ending Inventory that was understated
Is it because the company is using periodic inventory so at the end of every year they value and verify so whatever error there was in the beginning inventory is already corrected in the ending inventory. Please advise.
It's A! Admin please read commentaries from users and adjust answers for all questions as needed. Thank you