If opening stock is understated in a memorandum trading account, what is the likely effect on gross profit?
Correct answer: A. Gross profit is overstated
- A. Gross profit is overstated
- B. Gross profit is understated
- C. Net profit remains unchanged
- D. Closing capital is overstated only
Explanation
Opening stock is included in the cost of goods sold calculation. If it is understated, cost of goods sold is understated and the resulting gross profit is overstated.
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About Incomplete Records
Incomplete records require profit and financial position to be reconstructed when a complete double-entry system is unavailable. Methods include statements of affairs, capital comparisons, control accounts, cash summaries and margin calculations to find missing sales, purchases, expenses, assets, liabilities and drawings, while distinguishing business profit from changes in capital.
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