Question

If the ending inventory of a firm is overstated by $57,000, by how much and in what direction (overstated or understated) will the firm's operating income be misstated? (Hint: Use the cost of goods sold model, enter hypothetically "correct" data, and then reflect the effects of the ending inventory error and determine the effect on cost of goods sold.)

Answer 1

57,000 overstated

Step-by-step explanation:

the inventory identity is as follows:

`$$Beginning Inventory + Purchase = Ending Inventory + COGS`

Beginning invenotry and purchases cannot be alter as they are past measurement.

The impact of the overstated inventory mkaes the cost of good sold be 57,000 dollar less therefore; net income is misstated by 57,000 as well.

Because the COGS decreases the income a lower COGS generates an overstated net income.