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If the opening inventory of a business is undercast, it will
Answer & Solution
Correct Answer:
Option
D
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.
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.
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Login2. 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