The following uncorrected misstatements have been identified in the draft financial statements of Lissom Co: 1. Closing inventory overstated by $45,000 2. Accruals understated by $30,000 3. Revenue of $25,000 recorded for goods dispatched after the year end (the goods were correctly included in closing inventory and no cost of sales was recorded) 4. Depreciation overstated by $20,000 What is the net effect of these misstatements on reported profit?

Correct answer: B) Profit overstated by $80,000

Explanation

Overstated inventory overstates profit by $45,000 (cost of sales too low), understated accruals overstate profit by $30,000 (expenses too low) and revenue recorded too early overstates profit by $25,000 (as the goods remain in inventory, no cost of sales offsets it), a total of $100,000. Overstated depreciation understates profit by $20,000. Net effect = $45,000 + $30,000 + $25,000 - $20,000 = $80,000 overstatement. Adding all four gives $120,000, ignoring the opposite direction of the depreciation error.