Question

Oops, Inc. overstated its ending inventory, during its physcial inventory count, by $1,000 in year 1. Which of the following will also be misstated in year 1? (Check all that apply)

1) purchases will be overstated by $1,000
2) gross profit will be overstated by $1,000
3) cost of goods sold will be understated by $1,000
4) net income will be understated by $1,000

Answer 1

When Oops, Inc. overstated its ending inventory by $1,000, gross profit and net income will be overstated by $1,000, while cost of goods sold will be understated by the same amount. Purchases will not be directly affected.

Step-by-step explanation:

When Oops, Inc. overstated its ending inventory by $1,000 in year 1, this error affects various financial statements. According to the cost equation where Cost of Goods Sold (COGS) equals beginning inventory plus purchases minus ending inventory, an inflated ending inventory results in a decreased COGS. Consequently:

• Gross profit will be overstated by $1,000.
• COGS will be understated by $1,000.
• Net income will be overstated since COGS is understated.

In this scenario, only purchases will not be directly affected by the overstatement of ending inventory.