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
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.

Question

Quizplus · Accepted Answer

When closing stock is valued more, it increases the cost of goods sold (COGS) for the previous year, leading to an overstatement of profit for that year. In the current year, the opening stock (which is the previous year's closing stock) is overstated, resulting in higher COGS and thus an understatement of the current year's profit.

While Finalizing the Current Year's Accounts, the Company Realized That