Question

After the preparation of income statement, it was discovered that accrued expenses of 1,000 have been ignored and closing inventory has been overvalued by 1,300. This will have result in:

• A. An understatement of net profit of Rs 2,300
• B. An overstatement of net profit of Rs 300
• C. An understatement of net profit of Rs 300
• D. An overstatement of net profit of Rs 2.300

Answer 1

The correct option is D An overstatement of net profit of Rs 2.300

If accrued expenses of Rs $1,000$ have been ignored this will increase the net profit by Rs. $1,000$. If closing inventory is overvalued, it will also result in increasing the net profit by Rs. $1,300$. Thus, net effect will be profit increased by Rs. $2,300(1000+1300)$.