At December 31, 2011, McAdam Company overstated ending inventory by \($40,000\). How does this error affect cost of goods sold and net income for 2011?

a. Understates costs of goods sold and overstates net income

b. Overstates cost of goods sold and understates net income

c. Leaves both cost of goods sold and net income correct because the errors cancel each other

d. Overstates both cost of goods sold and net income