Understanding the Impact of Errors in Cost of Goods Sold Calculation
What effect will errors in Cost of Goods Sold calculation have on a company's financial statements?
1) Cost of Goods Sold will be overstated by 10000 and Gross Margin will be understated by 10000.
2) Cost of Goods Sold will be understated by 10000 and Gross Margin will be understated by 10000.
3) Cost of Goods Sold will be understated by 10000 and Gross Margin will be overstated by 10000.
4) Cost of Goods Sold will be overstated by 10000 and Gross Margin will be overstated by 10000.
Final Answer:
If a company fails to adjust Cost of Goods Sold for underapplied overhead, it will result in understated Cost of Goods Sold and overstated Gross Margin.
Errors in Cost of Goods Sold calculation can have significant implications on a company's financial statements. In the case of Sarasota Company using the direct write-off method, the underapplication of overhead costs can lead to misstatements in Cost of Goods Sold and Gross Margin.
When Cost of Goods Sold is not adjusted for underapplied overhead, it means that the actual costs incurred by the company are not accurately reflected in the calculation. As a result, Cost of Goods Sold will be understated by the amount of underapplied overhead, in this case, $10,000. This understatement of Cost of Goods Sold can have a ripple effect on other financial metrics and ratios that rely on this figure.
On the other hand, Gross Margin will be overstated by the same amount, $10,000. This means that the company's profitability appears higher than it actually is due to the misstatement in Cost of Goods Sold. Overstating Gross Margin can mislead investors, creditors, and other stakeholders who rely on this metric to assess the company's financial performance.
Therefore, it is crucial for companies to ensure the accuracy of Cost of Goods Sold calculations and make necessary adjustments for any underapplied overhead to present a true and fair view of their financial position and performance.