Question: #3 & 7 are wrong. Correct answers below. #3: Understatement of beginning inventory. Cost of Goods Sold: understated (COGS = Beginning Inventory + Purchases -

#3 & 7 are wrong. Correct answers below.

#3: Understatement of beginning inventory.

Cost of Goods Sold: understated (COGS = Beginning Inventory + Purchases - Ending Inventory)

Net Income: Overstated (higher COGS results in lower net income)

Retained Earnings: Overstated (net income flows into retained earnings)

#7: Overstatement of beginning inventory.

Cost of Goods Sold: Overstated (COGS = Beginning Inventory + Purchases - Ending Inventory)

Net Income: Understated (lower COGS results in higher net income)

Retained Earnings: Understated (net income flows into retained earnings)

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