Which of the following is a method by which inventory can be improperly stated?

• A. Manipulation of physical inventory count
• B. Inflation of the unit costs used to price inventory
• C. Failure to adjust inventory for the costs of goods sold
• D. All of the above

Answer: (D)

Inventory can be misstated in several ways because it affects both the asset value on the balance sheet and the cost of goods sold on the income statement. Manipulating the physical inventory count directly changes the quantity on hand, which in turn alters the recorded asset and the cost of goods sold when these quantities are used to calculate margins. Fraud or error in counting can hide losses, theft, or errors, leading to an inaccurate picture of available inventory.

Inflating the unit costs used to price inventory increases the reported cost per unit, which lifts the total value of the inventory asset. That overvaluation can distort both the balance sheet and the subsequent cost of goods sold, typically resulting in higher reported profits if not corrected when goods are sold.

Failing to adjust inventory for the costs of goods sold means the expenses tied to selling those goods aren’t properly recognized, which distorts COGS and, consequently, net income and the ending inventory balance.

Since each of these practices can lead to an incorrect inventory figure, the best choice recognizes that all of them are ways inventory can be improperly stated.