Question

If closing inventory is accounted for as Rs. 2,40,000 instead of Rs. 1,80,000. Which among the following will have an effect ?

• A. Gross profit as well as net profit will be overstated.
• B. Gross profit will be overstated and net profit understated.
• C. Gross profit and net profit would both be understated.
• D. Gross profit will be overstated but net profit correctly reported.

Answer 1

Answer: (A)

Gross profit as well as net profit will be overstated.

Gross profit is calculated using closing inventory and this gross profit is used further to find out net profit.

If the closing inventory has been raised by $Rs60,000$ then while calculating gross profit we will get an overstated value and hence, an overstated gross profit will lead to an overstated net profit.