Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error will effect the income statement. (Check all that apply.)

If the ending inventory was understated, that means that the cost of goods sold will be overstated. If the cost of goods sold was overstated, then net profits were understated.

Explanation:

Imagine a company that sells shoes:

It bought 100 shoes at $100 each during the whole year and their ending inventory was 10 units. This means that cost of goods sold was (100 - 10) x $100 = $9,000. But someone discovered 5 pairs in some shelf that were not included in the ending inventory, then the real ending inventory was 15 units = $1,500 and not $1,000. That also means that the cost of goods sold was $8,500, not $9,000. Lower costs = higher profits.

Explanation:

The current year's cost of goods will be too high

The current year's income will be too low

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