Correct Response: B. Mistakenly over-counting the ending inventory will reduce the amount in the cost of goods sold account and overstate the gross profit and net income. The cost of goods sold (COGS) formula is: beginning inventory + purchases – ending inventory = COGS. If the beginning inventory and purchases remain the same, a larger value of ending inventory will reduce the value of the costs of goods sold and it will be understated. Liabilities are not affected by inventory counts, so the liabilities will not be understated (A). When cost of goods sold is understated, both net income (C) and owner's equity assets (D) are overstated.
