PRC-1 · Chapter 7 · Question 41 of 100
If an entity mistakenly understates its opening inventory value, what is the direct impact on the current year's financial statements?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Cost of Sales will be understated, and Net Profit will be overstated.
Explanation
Cost of Sales = Opening Stock + Purchases - Closing Stock. If opening stock is too low, the total Cost of Sales will be artificially low. Lower expenses lead to an overstated Net Profit for the year.
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