O Level Accounting (7707)•7707/12/O/N/23
Explanation
Inventory Overvaluation Increases 2021 Gross Profit Steps:
- Inventory is valued at the lower of cost (350), requiring a $150 write-down.
- Valuing at cost overstates 2021 closing inventory by $150.
- Cost of sales (opening inventory + purchases - closing inventory) is understated by $150.
- Understated cost of sales overstates 2021 gross profit by $150.
Why A is correct:
- Gross profit = sales - cost of sales; understated cost of sales directly overstates gross profit.
Why the others are wrong:
- B: Total assets at 31 December 2021 were overstated due to overstated inventory, but the error's key impact is on 2021 profit.
- C: 2022 opening inventory overstatement increases cost of sales, understating 2022 profit.
- D: 2021 profit overstatement (+150), leaving 2022 capital correct.
Final answer: A
Topic: Valuation of inventory
Practice more O Level Accounting (7707) questions on mMCQ.me