Cake Mart understated its ending inventory in the current year by $$5,000.$ The company incorrectly reported net income of $$100,000.$ Determine the effect this error had on the financial statements.

Cost of goods sold will be too high by $$5,000,$ and this caused net income to be understated by $$5,000.$

Cost of goods sold will be too high by $$5,000,$ and this caused net income to be overstated by $$5,000.$

Total assets on the balance sheet will be too high by $$5,000.$

Cost of goods sold was too low by $$5,000,$ which caused net income to be overstated.

Recall the formula for computing a company's inventory turnover ratio.

Inventory turnover $=$ Cost of goods sold$/$Gross profit

Inventory turnover $=$ Cost of goods sold$/$Average inventory

Inventory turnover $=$ Merchandise Inventory$/$Cost of goods sold

Inventory turnover $=$ Merchandise Inventory$/$Average inventory

Recall the formula for computing a company's inventory turnover ratio.

Inventory turnover $=$ Cost of goods sold$/$Gross profit

Inventory turnover $=$ Cost of goods sold$/$Average inventory

Inventory turnover $=$ Merchandise Inventory$/$Cost of goods sold

Inventory turnover $=$ Merchandise Inventory$/$Average inventory