Choice "D" is correct. The $26,000 understatement of beginning inventory creates an understatement of cost of goods available for sale which leads to a $26,000 understatement of cost of goods sold. The $52,000 overstatement of ending inventory creates a $52,000 understatement of cost of goods sold. Thus, cost of goods sold, in total, is understated by $78,000 ($26,000 plus $52,000). Note: Amounts for beginning and ending balances and purchases are assumed.
| As stated
| − | Should be
| = | Difference
|
|---|
Beginning balance | $ 0 | | $ 26,000 | | $ (26,000) |
Plus purchases | 100,000 | | 100,000 | | 0 |
Less ending inventory | 52,000 | | 0 | | 52,000 |
| Cost of goods sold | $ 48,000 | | $ 126,000 | | $ (78,000) |
Choice "a" is incorrect. Cost of goods sold is also understated by $52,000 due to the overstatement of ending inventory.
Choice "c" is incorrect. The $26,000 understatement of beginning inventory creates an understatement, rather than an overstatement, of cost of goods sold. Cost of goods sold is also understated by $52,000 due to the overstatement of ending inventory.
Choice "b" is incorrect. Cost of goods sold is understated, rather than overstated, by $78,000.
