A retail organization mistakenly did not include $10,000 of inventory in the physical count at the end of the year. What was the impact to the organization's financial statements?
A.
Cost of sales and net income are understated.
B.
Cost of sales and net income are overstated.
C.
Cost of sales is understated and net income is overstated.
D.
Cost of sales is overstated and net income is understated.
It's D. This article (https://www.accountingcoach.com/blog/understating-ending-inventory) (as well as the Gleim textbook) states that if the ending inventory is understated, COGS is overstated and net income is understated. In this question, $10,000 was not accounted for in the ending inventory (understated), meaning the cost of what was sold that year is documented as MORE COSTLY (overstated) and when there's more COST, there's less profit (understated net income).
A cant be correct. If closing inventory did not include $10 000, inclusion of this amount will reduce cost of sales and increase profits. That means cost of sales was overstated and profits understated.
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