Which of the following describes the result if an organization records merchandise as a purchase, but fails to include it in the closing inventory count?
A.
The cost of goods sold for the period will be understated.
B.
The cost of goods sold for the period will be overstated.
C.
The net income for the period will be understated.
D.
There will be no effect on the cost of goods sold or the net income for the period.
Net income is affected by operating expenses and COGS. Overstating COGS would understating operating income but not net income. Thus only one answer is correct.
The direct impact is on the COGS and Gross Profit and by extension Net Profit. In the absence of Gross Profit in the answer options, the most appropriate answer will be the one revolving around COGS.
If inventory is understated then COGS will be overstated and Net Income is understated. How is the answered determined to be about COGS and not Net Income when both answers are correct?
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