Overstating closing inventory overstates profit and assets Steps:

• Closing inventory overvaluation increases the recorded asset value, overstating total assets on the balance sheet.
• Cost of goods sold (COGS) formula: opening inventory + purchases – closing inventory.
• Higher closing inventory reduces calculated COGS below actual.
• Lower COGS increases gross profit, overstating profit for the year.

Why no option is fully correct:

• A, B, C incorrectly state profit understated; it is actually overstated due to understated COGS.
• D correctly states profit overstated but wrongly states assets understated; assets are overstated from higher inventory.

Final answer: Profit overstated, total assets overstated