Question

Upon quarterly audit, the accountant found an error: The beginning inventory for the month of January was overstated. How would this effect the cost of goods sold (COGS) and net income for the month of January?

A. The COGS for January would be MORE than it actually was, and the net income would be less than it actually was.
B. The COGS for January would be LESS than it actually was, and the net income would be less than it actually was.
C. The COGS for January would be MORE than it actually was, and the net income would be more than it actually was.
D. The COGS for January would NOT be affected, and the net income for February would be less than it actually was.

Answer 1

When the beginning inventory for the month of January is overstated, it results in the cost of goods sold (COGS) being higher than it actually was, leading to a decrease in net income for the month.

Step-by-step explanation:

When the beginning inventory for the month of January is overstated, it means that the inventory value is higher than it actually is. This error affects the cost of goods sold (COGS) and net income for the month of January.

If the beginning inventory is overstated, the COGS for January would be more than it actually was. This is because the inventory that was supposed to be used in production or sold is now being recorded as part of the ending inventory.

As a result, the COGS is higher, and when COGS increases, net income decreases. Therefore, the correct answer is A. The COGS for January would be MORE than it actually was, and the net income would be less than it actually was.