Accounting for IGCSE & O level - Preparation Of Financial Statements (Section 1 - No. 21)
What would be the result if a company understated its closing inventory?
Cost of goods sold is understated and net profit is overstated
Cost of goods sold is overstated and net profit is understated
Cost of goods sold is overstated and net profit is overstated
Cost of goods sold is understated and net profit is understated
Explanation
Understating closing inventory leads to an overstatement of cost of goods sold, and therefore, an understatement of profit.
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