PRC-1 · Chapter 10 · Question 9 of 100
If an entity inadvertently understates its closing inventory by Rs. 200,000, what will be the effect on the financial statements if it remains uncorrected?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) The current year profit will be understated and next year profit will be overstated.
Explanation
Understating closing inventory increases cost of sales, thus understating current year profit. This closing inventory becomes next year's opening inventory; an understated opening inventory decreases next year's cost of sales, thereby overstating next year's profit.
More Preparation of Financial Statements MCQs
- Q11Mano and Aadi are partners sharing profits equally. Net loss for the year is Rs. (12,800). Interest on drawings is Rs. 480 (total)…
- Q12A business received an advance of Rs. 1.8 million against a total annual maintenance contract of Rs. 3.6 million. The contract runs for 9…
- Q13How is the 'Allowance for doubtful debts' account classified in the ledger?
- Q14The proprietor of a business withdraws goods costing Rs. 4,000 for personal use. No entry was made. What adjusting entry is required?
- Q15A business has Trade Receivables of Rs. 100 million. A customer owing Rs. 1 million has gone bankrupt and must be written off. The…