If cost of goods sold are understated, then is net income overstated or understated?
If cost of goods sold are understated, then net income would be overstated (inverse relationship). As you can see, if cost of good sold should have been $100 instead of $75, then net income should be $75 and not $100 (assuming no impact to operating expense.
Since there is an inverse relationship, that means net income would be understated if cost of goods sold are overstated.
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