Overstating ending inventory has the following effect on cost of goods sold and net income respectively
a. COGS - overstated and NI - overstated
b. COGS - understated and NI - overstated
c. COGS - overstated and NI - understated
d. COGS - No effect and NI - understated
b
FEEDBACK: a. Incorrect.
b. Correct. Overstating ending inventory decreases the amount allocated to cost of goods sold. An understated cost of goods sold increases gross margin and in turn net income.
c. Incorrect.
d. Incorrect.
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