If ending inventory is understated by Rs. 10,000, assuming no other errors, what is the effect on current-year profit?
Correct answer: B. Profit is understated by Rs. 10,000
- A. Profit is overstated by Rs. 10,000
- B. Profit is understated by Rs. 10,000
- C. Profit is unaffected in the current year
- D. Profit is understated by Rs. 20,000
Explanation
Cost of goods sold equals opening inventory plus purchases less ending inventory. An understatement of ending inventory increases cost of goods sold by Rs. 10,000 and therefore reduces current-year profit by that amount.
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About Inventory Valuation
Inventory valuation determines the cost of unsold goods and its effect on cost of sales and profit. The work covers inventory counts, included costs, FIFO and weighted-average costing, and the rule that inventory is reported at the lower of cost and net realisable value, not simply at its expected selling price.
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