If the beginning inventory is overstated and the ending inventory is understated, which of the following is/are true:
I. COGS is understated -
II. COGS is overstated -
III. Income is overstated -
IV. Income is understated -
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A. B. C. D.D
COGS = Beginning inventory - Ending inventory + Purchases Hence, if BI is overstated and EI understated, COGS is overstated, implying income is understated.
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.