Accounting Online Program Certification Practice Test

What factor could account for a trader's shortfall in mark-up?

1. Overstated opening inventory

2. Understated sales revenue

3. Overstated expenses

4. Too high price competition

The correct answer is: Overstated opening inventory

A trader's shortfall in mark-up can be attributed to overstated opening inventory because when the opening inventory is recorded at a higher value than it actually is, it inflates the cost of goods sold once that inventory is sold. This distortion leads to a lower gross profit margin, as the cost associated with the goods sold does not reflect their true cost. Essentially, if the trader believes they have more inventory worth more than it actually is, the subsequent sales will show a diminished mark-up, resulting in reduced profitability. While underreported sales revenue or overstated expenses can also impact the bottom line, they would not directly alter the relationship between sales and cost of goods sold in the same way that an inflated inventory does. High price competition can affect overall pricing strategy but does not directly relate to the accuracy of inventory valuation, making it less relevant in this context. Thus, an overstatement in opening inventory is a direct cause of reduced mark-up profitability.