If a company has an understated ending inventory, what is the effect on cost of goods sold and gross profit?

• A. Both cost of goods sold and gross profit are overstated.
• B. Cost of goods sold is overstated, leading to an understated gross profit.
• C. Cost of goods sold is unaffected, but gross profit is understated.
• D. Cost of goods sold is understated, leading to an overstated gross profit.

Answer: (B)