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In preparing a company’s financial statements for the current year, a company’s closing inventory was understated by $ 300,000.
What will be the effect of this error on profit if it remains uncorrected?
Will profit be overstated?
can you explain me this theory sir i’m a bit confused i seen the lectures but still not understanding the logic.If the closing inventory is too low, then the cost of sales will be too high. (cost of sales is opening inventory + purchases – losing inventory).
If cost of sales is too high, then profit is too low (profit is sales – cost of sales).
You say that you have watched all the lectures, but I do actually stress this because it is such a common question. Higher closing inventory results in higher profit, lower closing inventory results in lower profit.
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