Question

ABC's correct ending balance for the inventory account at the end of 2018 should be S5,000, but the company incorrectly stated it as $3,000. In 2019, ABC correctly recorded its ending balance of the inventory account. Which one of the following is true?

A) Gross profit is overstated by S2,000 in 2018.
B) Gross profit is overstated by S2,000 in 2019.
C) Cost of goods sold is understated by $2,000 in 2018.
D) Retained eanings are understated by $2,000 in 2019.

Answer 1

B. Gross profit is overstated by $2,000 in 2019.

Step-by-step explanation:

Gross profit which is the difference between net/sales revenue and the cost of sales/cost of goods sold, will be overstated by $2,000 in 2019.

This is because in 2018, the ending inventory was understated, the cost of sales would have been overstated and the gross profit also overstated.

Now that the 2019 is showing the correct figure, the ending inventory will be overstated , cost of sales understated and gross profit will be overstated by $2,000 ($5,000 - $3,000)