Poppy Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,000, and its ending inventory on December 31 was understated by $17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000 purchase. None of
these errors were discovered until the next year. As a result, Poppy's cost of goods sold for this year was:

a. Overstated by $31,000.
b. Overstated by $5,000.
c. Understated by $31,000.
d. Understated by $48,000

c. Understated by $31,000.

Explanation:

To calculate understatement, we use the following method

Understatement of beginning inventory understate = $30,000

Cost of inventory understate = $17,000

Using this, we have

Understatement of beginning inventory understates (–) cost of goods sold and the understatement of ending inventory overstates (+) cost of goods sold. Also, the understatement of purchases understates (–) cost of goods sold:–= $30,000 + 17,000 – 18,000

= ($20,000 – 2,000)

= –$31,000

As understatement of cost of goods sold by Poppy Co.

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