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if inventory is deliberately overstated, what will be the implication?
a) payables undervalued
b) profit reported higher than it should be
c) capital will be understatedWhat do you think? We are not here simply to provide answers to multiple choice questions.
I was questioned this in my ACCA f1 CBE examthat i gave yesterday. I was totally confused on this so i needed to clarify.
Inventory is independent from payables. The amount of closing stock tells you nothing about how it was bought (cash/credit) kr what might have been paid for.
If closing stock is overstated, cost of sales will be understated:
Cos = os + purchases – cs
So profits will be overstared too.
If profits are overstated so will closing capital
Closing capital = opening capital + profits – drawings
The correct answer is (b)
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