ACCA Applied Knowledge · Financial Accounting · Inventories
A company's draft profit for the year is $120,000. It later finds that closing inventory was overstated by $7,000 because of a counting error, and opening inventory was understated by $3,000 due to an earlier error. What is the corrected profit?
Corrected profit is $110,000. Reducing closing inventory by $7,000 lowers profit by that amount, and increasing opening inventory by $3,000 raises cost of sales and lowers profit by another $3,000, giving $120,000 less $10,000.
- A$110,000Correct
- B$116,000
- C$130,000
- D$124,000
Explanation
Overstated closing inventory overstates profit, so deduct $7,000. Understated opening inventory understates profit (cost of sales is too low), so... opening inventory increases cost of sales when corrected, reducing profit by $3,000. Total adjustment is -$10,000, giving $110,000. Option 4 wrongly adds the opening correction.
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