Final answer:
The cost of goods sold (COGS) for Bren Co. is overstated by $26,000 due to a $26,000 understatement in beginning inventory and a $52,000 overstatement in ending inventory. The correct answer to the effect on COGS is option b) Overstated by $26,000.
Step-by-step explanation:
The question pertains to how the understatement of the beginning inventory and the overstatement of the ending inventory affect the calculation of the cost of goods sold (COGS) for Bren Co. To determine the impact on COGS, we use the following formula:
COGS = Beginning Inventory + Purchases - Ending Inventory
If Beginning Inventory is understated by $26,000 and Ending Inventory is overstated by $52,000, the COGS would be calculated as being less than it should at the start and more than it should at the end of the period. As a result, this causes the COGS to be understated by the $26,000 from the beginning inventory and overstated by the $52,000 from the ending inventory.
The net effect would be calculated as follows:
Net Effect on COGS = - $26,000 (understated Beginning Inventory) + $52,000 (overstated Ending Inventory)
The correct net effect is an overstatement of $26,000 in COGS ($52,000 - $26,000 = $26,000). Therefore, the correct answer to the student's question is: b) Overstated by $26,000.