[vodrldnr]

Bren Co.’s beginning inventory at January 1, year 1, was understated by $26,000, and its ending inventory was overstated by $52,000. As a result, Bren’s cost of goods sold for year 1 was

A. Understated by $26,000.
B. Overstated by $26,000.
C. Understated by $78,000.
D. Overstated by $78,000.

Answer
(c) The requirement is to determine the effect of inventory errors on cost of goods sold. The effect of the errors on Bren’s year 1 cost of goods sold (CGS) is illustrated below. BI + P – $26,000 CGS understated $26,000 GAFS – EI (+ $52,000) CGS understated 52,000 CGS CGS understated $78,000 Beginning inventory is the starting point for the CGS computation, so BI errors have a direct effect on CGS. The understatement of BI ($26,000) causes an understatement of goods available for sale (GAFS) and thus of CGS. Ending inventory is subtracted in the CGS computation, so EI errors have an inverse effect on CGS. The overstatement of EI ($52,000) means that too much was subtracted in the CGS computation, causing another understatement of CGS. Therefore, CGS is understated by a total of $78,000.

can someone explain why understated Beginning inventory results in understand CGS ????

It ain't About How Hard You Hit

[Muhammad]

CGS = purchases + beg. inventory – ending inventory

if beg. inventory understated then CGS understated and Net Income overstated

[vodrldnr]

Muhammad Ibrahim> thank you so much !!

It ain't About How Hard You Hit

[Min]

Assuming actual beginning and ending inventory balance as x, y respectively, so z = x – y as actual cost of goods sold (here implies inventory purchases without understated or overstated).
Based on the scenario of the question: cost of goods sold is calculated by (x – 26,000) – (y + 52,000) => (x – y) – (26,000 + 52,000) => z – 78,000, therefore, actual COGS is deducted by 78,000, meaning understated by 78,000.

[Author]

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