Question

While finalizing the current year accounts, the company realized that an error was made in the calculation of closing stock of the previous year. In the previous year, closing stock was valued more by $Rs.50,000$. As a result ___________.

• A. Previous year profit is overstated and current year profit is also overstated
• B. Previous year profit is understated and current year profit is overstated
• C. Previous year profit is overstated and current year profit is understated
• D. There will be no impact on the profit of either the previous year or the current year

Answer 1

The correct option is C Previous year profit is overstated and current year profit is understated

Option C is correct.

Excess valuation of closing stock results in an excess profit in the previous year. Since closing stock is carried forward as opening stock in the current year as debit to trading account, this will results a lower profit in the current year.