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    Question

    While finalizing the current year’s profit, the

    company realized that there was an error in the valuation of closing inventory of the previous year. In the previous year, closing Inventory was valued more by â‚ą50,000. As a result:
    A Previous year’s profit is overstated and current year’s profit is also overstated Correct Answer Incorrect Answer
    B Previous year’s profit is overstated and current year’s profit is understated Correct Answer Incorrect Answer
    C Previous year’s profit is understated and current year’s profit is also understated Correct Answer Incorrect Answer
    D No effect on profit Correct Answer Incorrect Answer

    Solution

    If closing inventory is overstated in the previous year: • Previous year’s profit is overstated • The same amount becomes the opening inventory for the current year, thus inflating cost of goods sold and understating current year’s profit

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