Question

A company understated its ending inventory balance by $8,000 in 2021. What impact will this error have on cost of goods sold and gross profit in 2021 and 2022? Cost of goods sold Gross profit Understated Understated 1 $ $ 2021 8,000 8,000 Cost of goods sold Gross profit Not affected Not affected 2022 $ S 0 0

Answer 1

We know, Cost of Goods sold =			Beginning Inventory + Purchase - Ending Inventory
As the company understated it's ending inventory balance in 2021,
it resulted in an "overstatement" of Cost of Goods sold for the same year.
And as a result, Gross Profit got "understated" in 2021.
Cost of Goods Sold			Overstated		$ 8,000.00
Gross Profit			Understated		$ 8,000.00

Now, we know that ending inventory of the previous year is the beginning
inventory of the current year.
Therefore, the understated ending inventory of the previous year is now
the understated beginning inventory of the current year.
Going with the formula :			Cost of Goods sold =		Beginning Inventory + Purchase - Ending Inventory
An understated beginning inventory will result in an " understated" cost of goods sold and an
"overstated" gross profit.
Cost of Goods Sold			Understated		$    8,000.00
Gross Profit			Overstated		$    8,000.00