Final answer:
If ending inventory in period 1 is overstated, it will result in a lower COGS and higher gross profit in period 1. The effect will carry over to period 2 as well.
Step-by-step explanation:
If ending inventory in period 1 is overstated, it means that the value of the goods left unsold at the end of the period is higher than it should be. This will result in an overstatement of the closing inventory and an understatement of the Cost of Goods Sold (COGS). In period 1, the COGS will be lower than it should be because the overstated ending inventory is subtracted from the sum of opening inventory and purchases to calculate COGS. Consequently, the gross profit will be higher than it should be in period 1.
In period 2, the effect of the overstated ending inventory in period 1 will carry over. The opening inventory in period 2 will already be inflated by the overstated ending inventory of period 1. Therefore, the overstatement will continue to affect the COGS and gross profit in period 2.