Question

A company uses a periodic inventory system. The company’s accounting clerk miscounts inventory, overstating the inventory account by $1200. By what amount and in which direction (over/under) will COGS be misstated? (explain)

Answer 1

Answer- COGS is understated by $1200.

Explanation-

When ending inventory is overstated, it reduces the amount of inventory that would otherwise have been charged to the cost of goods sold during the period, so that the cost of goods sold expense declines in the current reporting period.

We can see this with the following formula that is used to derive the cost of goods sold:

Cost of Goods Sold =Beginning inventory + purchases - ending inventory .

Here Ending Inventory is subtracted to get COGS, so if Ending Inventory is Overstated by $1,200 then COGS will be understated by the same amount i.e $1,200.

Hence , COGS is understated by $1200 as a result of over statement of Ending Inventory by accounting clerk.