If the opening inventory of a business is undercast, it will
A. Increase gross profit and decrease net profit
B. Decrease gross profit as well as net profit
C. Increase value of assets
D. Increase gross profit as well as net profit
Answer: Option D
Solution (By Examveda Team)
What is Opening Inventory?Opening inventory is the value of goods a business has at the beginning of an accounting period. These goods are available for sale during that period.
What does Undercasting mean?
Undercasting means recording the opening inventory at a lower value than its actual amount.
How it Affects Gross Profit:
Gross Profit = Revenue – COGS
COGS = Opening Inventory + Purchases – Closing Inventory
If opening inventory is undercast, then COGS will be shown as lower.
Lower COGS → Higher Gross Profit.
How it Affects Net Profit:
Net Profit = Gross Profit – Operating Expenses
Since Gross Profit is overstated due to lower COGS, Net Profit will also be overstated.
Why the Other Options are Incorrect:
Option A: Incorrect, because net profit does not decrease in this case.
Option B: Incorrect, because both gross profit and net profit do not decrease; they increase.
Option C: Incorrect, because undercasting opening inventory does not directly increase the value of assets.
Correct Effect:
Both Gross Profit and Net Profit increase when opening inventory is undercast.
Therefore, the correct answer is Option D.
This Question Belongs to Commerce >> Accounting
Option B is correct
1. Sales - Cost of Goods Sold = Gross Profit
2. Cost of Goods Sold = Opening Inventory + Purchases - Closing Inventory
If you substitute 2. above into 1. you get:
Gross Profit = Sales - (Opening Inventory + Purchases - Closing Inventory)
Gross Profit = Sales - Opening Inventory - Purchases + Closing Inventory
how i did not get it?