Accounting for IGCSE & O level - Preparation Of Financial Statements (Section 6 - No. 32)
If the closing inventory is understated, how does it affect the cost of goods sold (COGS) and net profit?
COGS is understated, net profit is overstated
COGS is understated, net profit is understated
COGS is overstated, net profit is overstated
COGS is overstated, net profit is understated
Explanation
An understated closing inventory will lead to an overstatement of COGS (as a smaller value is used in the calculation) and thus an understatement of net profit.
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