Inventory Valuation and Gross Profit Effects

Steps:

• Gross profit = Sales - Cost of Goods Sold (COGS).
• COGS = Opening inventory + Purchases - Closing inventory.
• Undervaluing closing inventory reduces its value, increasing current COGS.
• Higher current COGS understates current gross profit; low opening inventory next period decreases next COGS, overstating next gross profit.

Why A is correct:

• Understating current gross profit and overstating next aligns with the COGS formula, as errors reverse across periods.

Why the others are wrong:

• B: Ignores the direct impact on COGS and gross profit in both periods.
• C: Captures current understatement but misses next period's overstatement.
• D: Recognizes current effect but wrongly assumes no reversal next period.

Final answer: A