PRC-1 · Chapter 7 · Question 24 of 100
If an entity accidentally overstates its closing inventory value, what is the direct impact on the financial statements for that year?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Cost of Sales will be understated, and Net Profit will be overstated.
Explanation
Cost of Sales = Opening Stock + Purchases - Closing Stock. If closing stock is too high, the subtracted amount is too large, making Cost of Sales too low. Lower expenses lead to an artificially high (overstated) Net Profit.
More IAS 2: Inventories MCQs
- Q26How are trade discounts treated when determining the cost of inventory?
- Q27How should refundable sales taxes (e.g., input VAT) paid on the purchase of raw materials be treated?
- Q28A business has 200 units of stock. The units cost Rs. 22 each. What is the value of the closing stock?
- Q29In a manufacturing entity, which of the following items is considered 'Work in Progress' (WIP)?
- Q30Which inventory valuation method assumes that the items of inventory that were purchased or produced first are sold first?