Undervalued closing inventory understates assets and profit

Steps:

• Closing inventory is a current asset; undervaluing it understates total current assets.
• COGS formula: Opening inventory + Purchases - Closing inventory; lower closing inventory increases COGS.
• Higher COGS reduces gross profit and net profit for the year.
• Thus, both current assets and profit are understated.

Why D is correct:

• Per COGS formula, undervalued closing inventory overstates expenses, understating profit, while directly understating balance sheet assets.

Why the others are wrong:

• A: Assets and profit are understated, not overstated.
• B: Assets are understated, not unaffected.
• C: Profit is understated, not unaffected.

Final answer: D