PRC-1 · Chapter 10 · Question 67 of 100
If closing inventory is completely omitted from the financial statements, what is the effect on the Cost of Sales and Net Profit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Cost of Sales is overstated; Net Profit is understated.
Explanation
Closing inventory is deducted to calculate Cost of Sales. Omitting it leaves Cost of Sales artificially high (overstated), which in turn artificially reduces (understates) Net Profit.
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