Multiple Choice Question

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 $$5,000,$ and this caused net income to be overstated by $$5,000.$

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

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