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Colman Company reports ending inventory in year 1 of instead of the correct amount of . The effects of this error
include:
Year 1 ending inventory is understated and year 1 cost of goods sold is overstated
Year 1 ending inventory is overstated and year 1 cost of goods sold is understated
Year 1 ending inventory is understated and year 1 cost of goods sold is understated
Year 1 ending inventory is overstated and year 1 cost of goods sold is overstated
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Ask by Fuentes Sanders. in the United States
Mar 26,2025

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Year 1 ending inventory is overstated and year 1 cost of goods sold is understated.

Solución

  1. The correct ending inventory should be , but the company reported .
  2. This means that the ending inventory is overstated by
  3. Since cost of goods sold ( ) is calculated as an overstated ending inventory results in an understated .
  4. Therefore, the effects of the error are:
    • Year 1 ending inventory is overstated
    • Year 1 cost of goods sold is understated.
Thus, the correct choice is:
Year 1 ending inventory is overstated and year 1 cost of goods sold is understated.

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In year 1, Colman Company’s reported ending inventory was , but the actual amount should have been . This means the ending inventory is overstated. Because the cost of goods sold (COGS) is calculated based on the ending inventory, an overstatement in inventory leads to an understatement of COGS. Thus, the correct relationship is: Year 1 ending inventory is overstated and year 1 cost of goods sold is understated.
One common mistake that companies make in inventory reporting is failing to conduct a physical inventory count regularly. This can lead to discrepancies between actual stock and reported figures, causing problems like over- or understatements in financial statements. Regular inventory audits can help keep this in check and ensure your financials reflect reality—nobody wants an embarrassing report on their hands!

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