(a)
Introduction: Cost of goods sold is the amount paid by the company to make the sale happen. It includes only direct costs like raw materials and direct labor. Indirect costs like selling and administrative expenses are not included in it.
Effect on the cost of goods sold
(b)
Introduction: Net income is the amount earned by the company after paying all its expenses which includes both direct and indirect expenses. It is useful for various users in knowing the profitability of the company.
Effect on net income.
(c)
Introduction: Value of COGS depends on the accounting standard followed. Since COGS reflects the cost therefore higher COGS means higher cost. In case of understatement of ending inventory, the cost of goods sold of the year is overstated while the net income of subsequent year is understated.
Effect on the cost of goods sold.
(d)
Introduction: Net income is calculated after considering expenses and taxes. It is used to determine earnings per share. It is also known as residual income as it is left after paying all expenses. In the case of the understatement of ending inventory, the net income of the year is understated while the net income of the subsequent year is overstated.
Effect on net income.
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Chapter 5 Solutions
FINANCIAL+MANAG.ACCT.
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