dontknow1987

BI + P - EI = COGS
Say you plug in these numbers for above equation $3000 + 5000 - 2000 = $6000
Then if you understate BI by $2000, then the COGS becomes $4000 and hence EBT will increase by $2000 (that is overstated)

Also if BI is overstated by $2000, then it is either COGS must be overstated by $2000 or the P is understated by $2000 to arrive at the correct result, if the EI is ok.

Look at the original equation above again, if BI is overstated by $2000 you can either overstate COGS or understate Purchases. Here COGS becomes $8000 or P becomes $3000 if EI is still ok at $2000


Hope this helps!