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What is the effect of closing stock on the profit of a sole trader?
What is the effect of closing stock on the profit of a sole trader?
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Practice Questions
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Q1
What is the effect of closing stock on the profit of a sole trader?
Increases profit
Decreases profit
No effect
Depends on the method of inventory valuation
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Closing stock increases profit as it reduces the cost of goods sold.
Questions & Step-by-step Solutions
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Q
Q: What is the effect of closing stock on the profit of a sole trader?
Solution:
Closing stock increases profit as it reduces the cost of goods sold.
Steps: 7
Show Steps
Step 1: Understand what closing stock is. Closing stock is the value of unsold goods at the end of a financial period.
Step 2: Know what profit is. Profit is the money a business makes after subtracting costs from sales.
Step 3: Learn about cost of goods sold (COGS). COGS is the total cost of producing or purchasing the goods that were sold during the period.
Step 4: Realize that when closing stock is high, it means fewer goods were sold, which affects COGS.
Step 5: Understand that if closing stock increases, COGS decreases because you have more unsold goods.
Step 6: Since profit is calculated by subtracting COGS from sales, a lower COGS means higher profit.
Step 7: Conclude that closing stock increases profit because it reduces the cost of goods sold.
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