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Answer:
The understatement of the ending inventory balance would result in an overstatement of the cost of goods sold. This will in turn result in an understatement of the gross and net profits for the year in the p/l.
Explanation:
The relationship between the elements of inventory in a financial statement is as shown below,
Opening balance + purchases - cost of goods sold = closing balance
As such, the understatement of the ending inventory balance would result in an overstatement of the cost of goods sold. This will in turn result in an understatement of the gross and net profits for the year in the p/l.
The understatement of the ending inventory will overstate the cost of goods sold and directly it will understate the gross margin and net income.
The periodic inventory system is the method of recording the inventory on a periodic basis. In this case, the inventory is recorded at the end of the financial period only. Thus, the chances of understatement or overstatement of the inventory can be high.
The amount of ending inventory affects the amount of cost of goods sold, gross profit, and net income. When the ending inventory is understated that is the amount is written less than the actual amount then it will show the higher cost of goods sold, lower gross margin, and lower net income.
These changes would be seen in the trading, and profit and loss financial statement.
To know more about the periodic inventory system, refer to the link:
https://brainly.com/question/8175598
