Final answer:
Overstating beginning inventory leads to an increase in COGS, lowering net income, and potentially misleading stakeholders.
Step-by-step explanation:
Overstating beginning inventory will increase the cost of goods sold (COGS). This is because the formula to calculate COGS is: beginning inventory plus purchases minus ending inventory. If the beginning inventory is overstated, it inflates the starting point of the calculation, resulting in a higher COGS than what would accurately reflect the economic reality. This has a direct effect on lowering net income since COGS is an expense on the income statement. Businesses need to maintain accurate inventory records to ensure financial statements are correct, as overstating inventory can mislead stakeholders and potentially lead to financial indiscretions.