Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 32

At an organization that uses a periodic inventory system, the accountant accidentally understated the organization's beginning inventory. How would the accountant's accident impact the income statement?

Answer options

• A. Cost of goods sold will be understated and net income will be overstated.
• B. Cost of goods sold will be overstated and net income will be understated.
• C. Cost of goods sold will be understated and there will be no impact on net income.
• D. There will be no impact on cost of goods sold and net income will be overstated.

Correct answer: A

Explanation

The correct answer is A because an understatement of beginning inventory leads to a lower cost of goods sold, which in turn inflates the net income. Options B and C are incorrect as they misrepresent the relationship between cost of goods sold and net income, while option D incorrectly states that there will be no impact on cost of goods sold.