If the beginning inventory for January is overstated, what is the impact on January's COGS and net income?

If the beginning inventory for January is overstated, what is the impact on January's COGS and net income?

• A. The COGS for January would be less than it actually was, and the net income would be less than it actually was.
• B. The COGS for January would not be affected, and the net income for February would be less than it actually was.
• C. The COGS for January would be more than it actually was, and the net income would be less than it actually was.
• D. The COGS for January would be more than it actually was, and the net income would be more than it actually was.

Answer: (C)

When beginning inventory is overstated, COGS for the period goes up. This happens because COGS is calculated as Beginning Inventory plus Purchases minus Ending Inventory. An inflated beginning amount adds to the total cost of goods available for sale, so COGS increases by that same overstatement. Since net income is tied to gross profit (sales minus COGS) and other things held constant, a higher COGS reduces net income for January. So January’s COGS would be more than it actually was, and January’s net income would be less than it actually was. This error can also carry into the next period via the ending inventory becoming the beginning inventory.

When beginning inventory is overstated, COGS for the period goes up. This happens because COGS is calculated as Beginning Inventory plus Purchases minus Ending Inventory. An inflated beginning amount adds to the total cost of goods available for sale, so COGS increases by that same overstatement. Since net income is tied to gross profit (sales minus COGS) and other things held constant, a higher COGS reduces net income for January. So January’s COGS would be more than it actually was, and January’s net income would be less than it actually was. This error can also carry into the next period via the ending inventory becoming the beginning inventory.