Closing stock was overstated. The effect is that
Question 1 Report
Closing stock was overstated. The effect is that
Answer Details
Closing stock is the value of unsold goods at the end of an accounting period. Overstating closing stock means that its value was recorded more than it actually was, resulting in an increase in the value of the stock. This, in turn, leads to a decrease in the cost of goods sold because the value of goods sold is reduced by the value of closing stock.
Therefore, if closing stock is overstated, the cost of goods sold will be understated. As a result, gross profit will be overstated because it is calculated by subtracting the cost of goods sold from the sales revenue. So, the effect of overstating closing stock is that the gross profit is overstated.
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