Question

Complete the sentence by selecting the correct term using the drop-down list. A company overstated its ending inventory at the end of Year 1. If the error was not detected, cost of goods sold would be for Year 1.

a) Understated
b) Overstated
c) Correctly stated

Answer 1

The company overstated its ending inventory at the end of Year 1 and if not detected, cost of goods sold would be understated for Year 1.

Step-by-step explanation:

The correct term to complete the sentence is understated.

If a company overstates its ending inventory, it means that they have recorded a higher value for their inventory than what it actually is. In this case, if the error was not detected and corrected, the cost of goods sold for Year 1 would be understated.

Understating the cost of goods sold means that the company would show lower expenses and higher profits for Year 1, which can lead to incorrect financial statements and misleading information for investors and stakeholders.