The Ending Merchandise Inventory Was Overstated

question 114

Multiple Choice

The ending merchandise inventory was overstated. This error would cause:

• A) net income to be understated.
• B) revenue to be understated.
• C) net income to be overstated.
• D) Cost of Goods Sold to be overstated.

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Definitions:

Margin of Safety

Represents the difference between actual or planned sales and the break-even sales, indicating the amount by which sales can drop before the business incurs a loss.

Contribution Margin Ratio

A financial metric that measures the proportion of sales revenue that exceeds variable costs, indicating how much revenue contributes to fixed costs and profit.

Variable Costs

Costs that vary in direct proportion to changes in levels of an activity or production volume.

Fixed Costs

These are expenses that do not change with the level of production or sales, such as rent, salaries, and insurance premiums.