Any enlightenment on the following question… An analyst notes the following about a company: Beginning inventory was reported as $5,000. Costs of goods sold were reported as $8,000. Ending inventory is $7,000 (the analyst has physically verified this amount). Which of the following statements is most accurate? A) If the analyst discovered that beginning inventory was overstated by $1,000, then cost of goods sold must have been understated by $1,000. B) Purchases must have been $6,000. C) If the analyst discovered that beginning inventory was understated by $2,000, then earnings before taxes must have been overstated by $2,000.
C B is definitely out as Purchase is $4000. (Opening + Purchase - Closing = COGS) A is wrong as well. Opening overstate, COGS will be overstated as well.
I agree with C, but wouldn’t the purchase amount in ‘B’ be $10k? 5000+10000-7000=8000 (Op)+ (purc)- (clos)= (cost)
Yeah, purchases is 10k.
Purchase is 10K. Who can explain this concept? Is there a calculation or formula required for such a question? Answer C says “If the analyst discovered that beginning inventory was understated by $2,000, then earnings before taxes must have been overstated by $2,000.” If the $5,000 beginning was overstated by $2,000, that means it should really have been $3,000. Now since ending inventory was physically verified, this means: 3000 + 10000 - 8000 = 7000 This calculation just doesn’t make sense.
The formula used is this Beg Inv + Purchases -End Inv = Cogs A)If Beg Inv is overstated by 1Unit, then COGs will also be oversted by 1 Unit. (Not the answer) B)Using the above eqn we get purchases = 10,000 C) Beg Inv is understated by 2 units, then Cogs will be also undestated by 2 units. Sales - cogs = Gross Profit Margin if COgs is understated, then Gross profit margin will be overstated and that difference will even exist till Net income. Hope this helps