# CMA Study Group

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## COGS Query

• #### 1.  COGS Query

Posted 22 days ago
Hello - can you please help me in understanding the correct answer d? I am unclear if the correct inventory balance is \$130,000 lower, how does the COGS be more:

Q. A company's finished goods inventory was miscounted, and the correct balance is \$130,000 lower.
Management is concerned about correcting the error because bonuses are only earned if the
minimum gross profit margin is 45%. Selected financial information is shown below.

Revenues \$1,000,000
Cost of goods sold 500,000
Salaries 57,000
Accounts receivable 22,000
Cash 43,000

With the corrected inventory, will the bonus target be met?

a. Yes, the gross profit margin will increase.
b. No, the working capital will decrease.
c. Yes, the gross profit margin will not change.
d. No, the cost of goods sold will increase. (Correct - Correcting the inventory error will cause cost of goods sold to increase.)

Thank you,
db

• #### 2.  RE: COGS Query

Posted 22 days ago
The formula to calculate the Cost of Goods Sold = Beginning Inventory + Purchases during the period - Closing stock

So, if the inventory (Closing Stock) is undervalued, it will automatically increase the COSG.

Thanks

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Ashvin Kulkarni
Accountant
Pune
India
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• #### 3.  RE: COGS Query

Posted 22 days ago
Thank for your reply but still I am not convinced with the response, please see below what I can see that COGS will reduce:

 Actual (Shown \$130K less) Should be (Added \$130K in ending bal.) Begin. Invent. 500 500 Purchase 120 120 Ending Invent. 320 420 COGS 300 200

Thank you,
db

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Dhiraj Bhojwani
Supervisor
Bangalore
India
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• #### 4.  RE: COGS Query

Posted 22 days ago
I am sorry, the inventory is not undervalued but is actually Overvalued.

The first sentence "A company's finished goods inventory was miscounted, and the correct balance is \$130,000 lower" says it all.

You should not add the 130K but it need to be deducted from closing inventory to get the correct amount.

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Ashvin Kulkarni
Accountant
Pune
India
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• #### 5.  RE: COGS Query

Posted 22 days ago
Yes, I think this helps or we can add \$130K to beginning balance, that will also help. But, overall, the question seems simple but it isn't. Thank you.

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Dhiraj Bhojwani
Supervisor
Bangalore
India
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• #### 6.  RE: COGS Query

Posted 22 days ago
It was a tricky one.

Most welcome.

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Ashvin Kulkarni
Accountant
Pune
India
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