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Correct Answer:
Option A: Cost of goods sold understated, net income Overstated
Explanation:
When the ending inventory for 2016 is understated, that means the beginning inventory for the year 2017 is understated, which will result in understatement of cost of goods sold.
If the cost of goods sold is understated, the net income will be overstated, since the gross profit (sales revenue - cost of goods sold) will be overstated.
End of answer.
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San Lorenzo General Store uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the month of October 2021: Cost Retail Beginning inventory $35,000 $50,000 Net purchases 19,120 31,600 Net markups 1.200 Net markdowns 800 Net sales 32,000 Required: Estimate the average cost of ending inventory and cost of goods sold for October using the information provided.
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