ACCA FA · Chapter 5 · Question 8 of 10
Closing inventory at the end of 20X5 was overstated by $5,000. This error was not discovered and the opening inventory for 20X6 was brought forward at the same incorrect amount. What is the effect on reported profit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Profit for 20X5 is overstated by $5,000 and profit for 20X6 is understated by $5,000
Explanation
Overstating closing inventory reduces cost of sales and overstates 20X5 profit by $5,000. The same figure becomes opening inventory in 20X6, increasing cost of sales and understating 20X6 profit by $5,000. Over the two years the error reverses, so cumulative profit is correct by the end of 20X6.
More Inventory (IAS 2) MCQs
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- Q3A business holds 40 units of an item that cost $850 each. The items can be sold for $900 each, but each unit first needs modifications…
- Q4A business has three product lines in inventory at its year end: Product X: cost $2,400, NRV $3,100 Product Y: cost $5,600, NRV $4,900…