Final answer:
The undercounting of Unzips Inc's inventory would result in a $1,200 understatement of net income, since it causes an overstatement of COGS which then reduces gross profit and consequently the net income of the company.
Step-by-step explanation:
When a company such as Unzips Inc makes an error in the physical count of goods at the end of a period, it directly affects the financial statements. An understatement of the ending inventory by $1,200 means that the actual value of inventory on hand was $1,200 more than what was reported. This error leads to a series of impacts on the company's financial reporting for the period.
The correct answer to the question is A: Net income will be understated. When the ending inventory is understated, this increases the cost of goods sold (COGS) because the formula for COGS is beginning inventory plus purchases minus ending inventory. With a lower ending inventory, COGS appear higher than they actually are. This reduction in inventory subsequently leads to a lower gross profit and, after accounting for all selling and administrative expenses, results in a lower net income.
Therefore, options B, C, and D are incorrect. Cost of goods available for sale is not directly affected by this inventory count error, it only affects ending inventory and COGS. Cost of goods sold will not be understated; it's actually overstated because of the error. Lastly, gross profit will not be overstated; it will actually be understated since an overstated COGS reduces gross profit.