Example: ABC Company completed its physical inventory count at the end of 20X8 and adjusted the

accounting records accordingly. As a result, on January 1, 20X9, the company’s beginning inventory
was $150,000. During 20X9, ABC purchased $525,000 of inventory and had an ending inventory of
$100,000.
However, management later discovered that at the end of 20X8 the company failed to count $30,000
of inventory. ABC also discovered that the purchases for 20X9 were overstated by $18,000 as a
result of some purchases having been recorded twice. Finally, the ending inventory count at the end
of 20X9 was overstated by $15,000.

The best way to determine the total effect of these errors is to set up two COGS calculations: the
first determines what Medina did and the second determines what it should have done.

What ABC Company DID What ABC Company SHOULD HAVE DONE

Beginning inventory $150,000 $180,000

+ Purchases 525,000 507,000
− Ending inventory (100,000) ( 85,000)
= Cost of goods sold $575,000 $602,000

Through these two calculations, it is easy to see that the cost of goods sold was understated as a
result of these errors. If the company had recorded everything correctly, the cost of goods sold
would have been $602,000 instead of the recorded $575,000.