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Firm's Tax Rate, Beginning Inventory Overstatement, Purchases Understatement, Ending Inventory Overstatement, and Income Calculation

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A firm's tax rate is 30%. If the beginning inventory was overstated by 50, the purchases understated by 30 and the ending inventory overstated by 10, the income is ________.

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A. B. C. D.

D

Ending inventory = beginning inventory + Purchases - COGS Hence, in this case, COGS is overstated by 50 + (-30) - 10 = 10. Therefore, income is understated by 10*(1-tax rate) = 7. It should be remembered that implicit in the use of the above inventory equation is the assumption that there have been no write-downs or write-ups in the inventory.

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