Overstating Inventory

[rexthedog]

Firms that overstate inventory so that a lower proportion of costs are assigned to COGS.

Could someone please explain this statement? What does it mean to overstate inventory and how does it affect COGS?

THanks

[sglondon]

Beginning inventory + purchases - COGS = ending inventory.

If firms are overvaluing ending inventory then it has a 1:1 impact on the value of COGS. Less likely to be an issue for companies using a perpatual inventory costing system and more likely for periodic.

[Atomic_Sheep]

Correct me if I’m wrong, but this formula:

@sglondon

Beginning inventory + purchases - COGS = ending inventory.

is only used when you have a periodic inventory system in place?

[S2000magician]

@Atomic\_Sheep

Correct me if I’m wrong, but this formula:

@sglondon

Beginning inventory + purchases - COGS = ending inventory.

is only used when you have a periodic inventory system in place?

Nope: periodic or perpetual.

[Atomic_Sheep]

Ok thanks. I guess stock counts happen in both.