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Hey this question is from Kaplan
What would be the effect on entity’s profit for the year of discovering that inventory with cost of $1250 & net realisable value of $1000 has been omitted from original inventory valuation?
ANS:- an increase of $1000I understand $1000 part but how is it increasing the profit when inventory value is ommitted it mean inventory decrease so profit should also decrease.. I am considering inventory as closing inventory and if closing inventory increases profit increase and vice versa. Can you please explain!!
The cost of goods sold is the opening inventory plus the purchases less the closing inventory.
They have omitted inventory so when this is corrected then the closing inventory increases. This therefore reduces the cost of goods sold (because we are subtracting a bigger amount) and a lowed cost of goods sold means an increase in the profit.(Or another way of thinking about it is to think of the SOFP. Higher inventory means that the assets are higher. For the SOFP to balance is must also make the profit higher.)
So it is increasing profit after correction right? But if it is not corrected it would be decreasing profit?? .. but it’s not mention in question about correction so we should assume it as if they are asking after correction?
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