Questions: Multiple Select Question Select all that apply Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error affects the current year's income statement. - The current year's cost of goods sold will be too low. - The current year's cost of goods sold will be too high. - The current year's net income will be too low. - The current year's net income will be too high.

Multiple Select Question

Select all that apply

Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error affects the current year's income statement.

- The current year's cost of goods sold will be too low.
- The current year's cost of goods sold will be too high.
- The current year's net income will be too low.
- The current year's net income will be too high.

Transcript text: Multiple Select Question Select all that apply Q-mart failed to include inventory that was kept in a separate warehouse in its $12 / 31$ end-of-the-period inventory count. Consequently, the ending inventory on $12 / 31$ was understated on the balance sheet. Explain how this error affects the current year's income statement. The current year's cost of goods sold will be too low. The current year's cost of goods sold will be too high. The current year's net income will be too low. The current year's net income will be too high.

Solution

Answer

The answer is:

The current year's cost of goods sold will be too high.
The current year's net income will be too low.

Explanation

Option 1: The current year's cost of goods sold will be too low.

This option is incorrect. If the ending inventory is understated, it means that less inventory is accounted for at the end of the period. This results in a higher cost of goods sold (COGS) because COGS is calculated as: \[ \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \] An understated ending inventory increases COGS.

Option 2: The current year's cost of goods sold will be too high.

This option is correct. As explained above, an understated ending inventory leads to a higher COGS because the formula for COGS subtracts the ending inventory. If the ending inventory is lower than it should be, the COGS will be higher.

Option 3: The current year's net income will be too low.

This option is correct. Since the COGS is overstated due to the understated ending inventory, the gross profit will be lower. Gross profit is calculated as: \[ \text{Gross Profit} = \text{Sales} - \text{COGS} \] A lower gross profit results in a lower net income, assuming other expenses remain constant.

Option 4: The current year's net income will be too high.

This option is incorrect. As explained, the net income will be lower due to the higher COGS and consequently lower gross profit.

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