15. A company using a periodic inventory system fails to include some items in ending inventory at the end of the year. Which effect will this omission have on the income statement?
Answer: A
It will overstate cost of goods sold and understate net income.
Failing to include some items in ending inventory results in an inaccurate calculation of cost of goods sold (COGS). Specifically, COGS will be overstated since the omitted inventory will not be subtracted from the total goods available for sale, leading to a corresponding understatement of net income.
A) It will overstate cost of goods sold and understate net income.
This option correctly describes the financial impact of omitting inventory. When ending inventory is understated, the cost of goods sold is calculated as higher than it should be, which directly reduces net income. Therefore, this option accurately reflects the consequences of the inventory omission in the financial statements.
B) It will understate sales and overstate operating expenses.
This option is incorrect because the omission of inventory does not affect sales figures. Sales are recognized at the point of sale, and inventory counts do not directly impact this measure. Consequently, operating expenses would not be overstated as a result of this omission.
C) It will overstate sales and understate operating expenses.
This option is also incorrect. The omission of inventory does not lead to an increase in sales figures; rather, it affects the calculation of COGS. Furthermore, operating expenses are not directly tied to inventory levels in this scenario, making this statement inaccurate.
D) It will understate cost of goods sold and overstate net income.
This option is incorrect because omitting inventory leads to an overstatement of COGS, not an understatement. As a result, net income would be understated rather than overstated, contradicting the implications of this choice.
Conclusion
The correct answer is A, as it accurately captures the financial implications of excluding inventory from the ending balance. All other options misinterpret the relationship between inventory, cost of goods sold, and net income, leading to incorrect conclusions about the financial statements' outcomes.