CFA Practice Question

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CFA Practice Question

Inventory at the end of the current period was erroneously understated. Which of the following is true as a result of the understatement not being corrected? Assume FIFO is used.
A. The cost of goods sold for the current year is understated.
B. Net income at the end of the following year will be overstated.
C. Net income for the current year is overstated.
Explanation: Net income is understated and capital (retained earnings) is understated. For the following year, the cost of goods sold will be understated and net income overstated.

User Contributed Comments 8

User Comment
chopley Why not A?
ManuB COGS is overstated, not understated. This causes the income to be understated.
dblueroom COGS=beginning inventory+purchase-ending inventory, and if the ending inventory is lower (understated), COGS will be overstated.
serboc great question......
ybavly why the following year and not this year?
Vedo I guess since the error was not corrected, next yar COGS will be lower as a result of lower inventory cost. Which will result in overstated NI.
davcer next year you will have beg inventory understated, so Cogs=beg+purch-end understated and NI overstated
CJPerugini B is only correct if we are using FIFO or weighted average cost. Otherwise we cannot tell.
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