CFA Practice Question

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CFA Practice Question

An overstatement of ending inventory would result in an ______.

A. overstatement of total asset turnover
B. understatement of quick ratio
C. understatement of current ratio
D. overstatement of profit margin
Correct Answer: D

If ending inventory is overstated, cost of goods sold is understated and income is overstated. This would cause profit margin (income/sales) to be overstated. If inventory is overstated, then total assets are overstated, which would cause asset turnover to be understated, not overstated. Ending inventory has no effect on quick ratio. Current ratio would be overstated, not understated.

User Contributed Comments 5

User Comment
sarath quick ratio = cash+marketable securities + Receivables / CL

No inventory component so no effect on the quick ratio ...
guna (OB+Purchases) - COGS = EI. If EI overstated, (OB+purchases) remains constant, only COGS should have been reduced to get an inflated EI.
In the Income Statement COGS is like an expense, understating an expense would overstate Income
johntan1979 :( I got this wrong because I confused profit margin with gross margin and thought net income should be NET profit margin, not just profit margin.
Inaganti6 Wow i got something right and Johntan1979 didn't. Maybe I do stand a chance in this exam !
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