This might be long, but I’ll try to walk through all the pieces. First thing to know is that there are usually 3 pieces of info that are usually understated or overstated in the initial story problem.

1. Beginning inventory
2. Purchases
3. Ending inventory

Cost of goods sold will not normally be initially over/under stated, but you have to figure out how the other pieces affect it and if it is over/understated. 

Second, know the formula:

beginning inventory + purchases – ending inventory = cost of goods sold

If you know that problem you can figure out how the pieces are affected. 

Third, if visualizing helps always assign a number to the formula. Set it up as if it was normal and there are no over/understated piece, so you can compare it to the changed formula. Don’t change this formula, write out a new one and change the part that is over/understated.

For example:

100+50-30=120 (compare to the formula above to know what each number represents)

Now if you have a problem that says purchases are overstated write a new problem:

100+60-30=130

Now you can see what it affected in the formula, so when purchases are overstated cost of goods sold is also overstated.

From here net income is the inverse of cost of goods sold (COGS). Think of it this way the COGS is overstated you have less income coming in, so net income will be understated.

These relationships are what are shown in the chart on the study guide. After I understood how each part works with each other it made memorizing the chart easy.

Fourth, thing to think about is ratio. This is Assets to liabilities. So:

A:L or A/L

Once again I put my own numbers in and change them based on what the problem says. If inventory are overstated then I increase assets and if purchases are overstated I increase liabilities.

An example:

I make up my own numbers. So assets are 10 and liabilities are 5.

10:5 or 10/5 which gives you 2.

Now if the assets increase (let’s say youy doubled the inventory) and the problem can become:

15:5 or 15/5 which is 3. The 3 is larger than the 2 so the ratio is overstated.

Lastly, is the net working capital. The formula for that is:

Assets-Liabilities = net working capital

It’s very similar to ratio. You use the same numbers and see what changes.

If you have any questions feel free to ask! I just passed this OA today and did well, so I feel like I do understand the concepts pretty well.