While finalizing the current year's 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 50,000. As a result
Correct answer: C. Previous year's profit is overstated and current year's profit is understated.
- A. Previous year's profit is overstated and current year's profit is also overstated.
- B. Previous year's profit is understated and current year's profit is overstated.
- C. Previous year's profit is overstated and current year's profit is understated.
- D. There will be no impact on the profit of either the previous year or the current year.
Explanation
Overstating closing inventory increases the previous year’s profit by 50,000. That same amount becomes overstated opening inventory in the current year, increasing cost of goods sold and understating current-year profit.
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About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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