There was an error in the valuation of closing stock of the previous year. In the previous year, the closing stock was valued more by Rs. 5,000. What will be its effect on current year’s profit? (Just mention whether the current year’s profit will be overstated, understated or remains unaffected).
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Hello thanks a lot for asking this amazing question.
The answer to the question is stated below:
The current year's profit will be 'overstated'.
The reason being that last year's closing stock will be this years opening stock. Since opening stock is added in cost of goods sold so if the opening stock is valued more by 5000 this means that more amount is being added into cost of goods sold due to which the gross profit will be overstated and similarly after the subtraction of expenses the net profit will be overstated.
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