Impact of Inventory – MCQ

Practice Question

Intro to Financial Accounting
Cost of Sales and Inventory Management
Impact of Inventory on Financial Statements
MCQs

If the ending inventory is understated, what effect does this have on the cost of goods sold?

  • A. Cost of goods sold is overstated
  • B. Cost of goods sold is understated
  • C. There is no impact on cost of goods sold
  • D. Ending inventory is irrelevant to cost of goods sold
Answer +
Correct Answer: A
Explanation +

Understating ending inventory leads to an overstatement of cost of goods sold (COGS) because COGS is calculated as:

COGS = Beginning Inventory + Purchases – Ending Inventory

When ending inventory is lower than it should be, the result is a higher COGS, which decreases gross profit and net income.

This highlights the importance of accurate inventory valuation for proper financial reporting and performance analysis.