in vi 14 The following table shows twoyear period 2016 and 2

in vi 14. The following table shows two-year period (2016 and 2017) Correct Income Statement Company 2016 100,000 201 Revenue COGS 100,000 Beginning inventory Purchased Goods available for sale Less: Ending inventory Cost of Goods Sold 25,000 45,000 70,000 30,000 40,000 60,000 40,000 20,00o 30,000 60,000 90,000 40,000 50,000 50,000 40,000 10,000 Gross profit Operating Expenses Net income

Solution

Answer: Option B. understate ending retained earning of 2016 and understate COGS of 2017.

The understatement of ending inventory in 2016 will result in overstatement of COGS and hence understatement of net income in 2016. This understatement of net income will result in the understatement of ending retained earnings of 2016.

In 2017, the understatement of 2016 ending inventory will result in an understatement of beginning inventory of 2017. Hence the cost of goods available for sale will be understated and after deducting the ending inventory the COGS remain understated for 2017.