24 June, 00:44

Colman Company reports ending inventory in year 1 of \$25,000 instead of the correct amount of \$20,000. The effects of this error include:Year 1 ending inventory is understated and year 1 cost of goods sold is overstatedYear 1 ending inventory is overstated and year 1 cost of goods sold is understatedYear 1 ending inventory is understated and year 1 cost of goods sold is understatedYear 1 ending inventory is overstated and year 1 cost of goods sold is overstated

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1. 24 June, 02:09
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Year 1 ending inventory is overstated and year 1 cost of goods sold is understated

Explanation:

The amount of ending inventory is increased by \$ 5000 so the ending inventory is overstated and the cost of goods sold is understated as an amount of additional \$ 5000 is deducted from it. For better understanding we consider the following

Opening Inventory \$ 15000

Purchases \$ 50,000

Ending Inventory \$ 20,000

Cost Of Goods Sold = \$ 45,000

Suppose we write \$ 20,000 as \$ 25,000 we get

Opening Inventory \$ 15000

Purchases \$ 50,000

Ending Inventory \$ 25,000

Cost Of Goods Sold = \$ 40,000

So we see that Year 1 ending inventory is overstated and year 1 cost of goods sold is understated by an amount of \$ 5000