A Level Accounting (9706)•9706/11/M/J/21
Explanation
Inventory error overstates 2020 profit and dividend, reverses in 2021
Steps:
- Closing inventory overstated by 10,000, overstating profit by $10,000.
- Dividend = 40% of overstated profit, so overstated by 4,000 (dividend portion impact).
Why C is correct:
- Matches net dividend overstatement (14,000 decrease via COGS = opening inventory + purchases – closing inventory).
Why the others are wrong:
- A: Shows decreases for both years, ignoring 2020 profit overstatement.
- B: Reverses signs and inflates 2021 increase, contradicting error reversal.
- D: Overstates 2020 effect as full $10,000 and understates 2021 decrease by netting carryover.
Final answer: C
Topic: Preparation of financial statements
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