### 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).