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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 overstated

Year 1 ending inventory is overstated and year 1 cost of goods sold is understated

Year 1 ending inventory is understated and year 1 cost of goods sold is understated

Year 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
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