What is a result of overstating purchase allowances?

Overstating purchase allowances leads to a situation where the amount reported for cost of goods sold (COGS) is understated. Purchase allowances reduce the cost of purchases because they represent discounts or refunds from suppliers due to various reasons such as defects or price adjustments. When these allowances are overstated, the overall reduction applied to purchases is inaccurately high.

As a result, the expense related to COGS is lower than it should be. This adjustment in purchase allowances affects the calculation of COGS directly; if the cost is reported lower due to overstated allowances, the underestimation of COGS results in a higher reported net income than what would actually be the case. Therefore, understating COGS due to overstated purchase allowances creates a misleading picture of profitability.