In taking a physical inventory at the end of Year 1, Grant Company forgot to count certain units and understated ending inventory by $18,000. Determine how this error effects each of the following. For each question (a-d) choose the best answer stated under each question.

(a) Year 1 cost of goods sold.

Overstates Year 1 cost of goods sold.

Understates Year 1 cost of goods sold.

None of the above.

(b) Year 1 net income.

Understates Year 1 net income

Overstates Year 1 net income

None of the above.

(c) Year 2 cost of goods sold.

Understates Year 2 cost of goods sold.

Overstates Year 2 cost of goods sold.

None of the above.

(d) Year 2 net income.

Understates Year 2 net income

Overstates Year 2 net income

None of the above.