At december 31, 2018 , stevenson company overstated ending inventory by $36,000. how does this error affect cost of goods sold and net income for 2018 ?

Question

Bruce

Business

25 December, 10:08

At december 31, 2018 , stevenson company overstated ending inventory by $36,000. how does this error affect cost of goods sold and net income for 2018 ?

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Booth · Answer 1

The Cost of Good Sold is $36,000 lower than it should have been and the net income is $36,000 higher than it should have been.

There are two formulas that are important to know for this question. The first is Beg. Inventory + Purchases - Ending Inventory = COGS. The second formula is Sales - Cost of Good Sold = Gross Profit.

If you reported a higher ending inventory it is going to result in a lower value for Cost of Good Sold. In this case the company had too high of an ending inventory by $36,000, which mean that the COGS is $36,000 lower than actual.

When you have a COGS that is lower than it should be you are going to have a gross profit which is overstated. The Income is overstated by $36,000.