CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Which of the following statement(s) is (are) true?

I. Should an error that understates the ending merchandise inventory not be discovered, the Retained Earnings account will be overstated at the end of the subsequent year.

II. The gross profit is 45% of net sales. The cost of goods sold then must be 55% of net sales.

III. If the cost of goods sold increases by 1% of sales during the period, the gross profit and net income will decrease by 1% of sales because of this increase.

IV. The average inventory totals $20,000 and the cost of goods sold totals $200,000. The inventory turnover rate is 15.0.
A. I and IV
B. II only
C. I and III
Explanation: I. If the error, which will understate current-year net income, is not discovered, the overstatement of the subsequent year's income will effectively correct the Retained Earnings account.

II. Net sales (100%) less the cost of goods sold equals gross profit: 100% - 55% = 45%.

III. Assume that the cost of goods sold is 44% of net sales. Then the gross profit must be 56% of net sales. When the cost of goods sold increases to 45%, the gross profit is lowered to 55%.

IV. Cost of goods sold/Average inventory = Inventory turnover. The turnover rate is 10.0 to 1 ($200,000/$2,000 = 10.0).

User Contributed Comments 3

User Comment
EK65 Even though III is correct for the Gross profit the Net Income (included in the question as well) is not going to decrease for 1%. It makes the statement incorrect.
davideme20 Can anybody elaborate number 2 please? I thought that Net Sales= Gross profit - COGS.
shabi @davideme20: for example, net sales 100, gross profit is 45, then COGS is 55, 55% of net sales. What's wrong?
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