Question from Inventories statements, beginning, physically

Matori

Any enlightenment on the following question…
An analyst notes the following about a company:
Beginning inventory was reported as $5,000.
Costs of goods sold were reported as $8,000.
Ending inventory is $7,000 (the analyst has physically verified this amount).
Which of the following statements is most accurate?
A) If the analyst discovered that beginning inventory was overstated by $1,000, then cost of goods sold must have been understated by $1,000.
B) Purchases must have been $6,000.
C) If the analyst discovered that beginning inventory was understated by $2,000, then earnings before taxes must have been overstated by $2,000.

onelife1

The formula used is this
Beg Inv + Purchases End Inv = Cogs
A)If Beg Inv is overstated by 1Unit, then COGs will also be oversted by 1 Unit. (Not the answer)
B)Using the above eqn we get purchases = 10,000
C) Beg Inv is understated by 2 units, then Cogs will be also undestated by 2 units.
Sales  cogs = Gross Profit Margin
if COgs is understated, then Gross profit margin will be overstated and that difference will even exist till Net income.
Hope this helps

franzino

I agree with C, but wouldn’t the purchase amount in ‘B’ be $10k?
5000+100007000=8000
(Op)+ (purc) (clos)= (cost)

ruchita

C
B is definitely out as Purchase is $4000. (Opening + Purchase  Closing = COGS)
A is wrong as well. Opening overstate, COGS will be overstated as well.