What is the effect of an overstatement of closing inventory on the profit for the year?

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Q: What is the effect of an overstatement of closing inventory on the profit for the year?

Solution: An overstatement of closing inventory leads to an understatement of cost of goods sold, resulting in overstated profit.

Steps: 7

Step 1: Understand what closing inventory is. Closing inventory is the value of goods that are still unsold at the end of the accounting period.
Step 2: Know that cost of goods sold (COGS) is the total cost of producing or purchasing the goods that were sold during the period.
Step 3: Realize that COGS is calculated by taking the opening inventory, adding purchases, and subtracting closing inventory.
Step 4: If closing inventory is overstated, it means we are counting more unsold goods than we actually have.
Step 5: When closing inventory is overstated, the COGS will be lower than it should be because we subtract a larger number (the overstated inventory).
Step 6: A lower COGS means that the profit (sales revenue minus COGS) will be higher than it should be.
Step 7: Therefore, an overstatement of closing inventory results in an overstated profit for the year.