alleryIf closing inventory is overstated, net income for the period will be:
AUnderstated by overstatement
BOverstated by overstatement
CUnaffected by valuation
DAlways exactly zero
Answer & Solution
Correct answer: B. Overstated by overstatement
1. COGS = Opening + Purchases − Closing inventory.
2. Overstating closing inventory reduces COGS.
3. Lower COGS means higher gross profit and higher net income.
_Source: ICAI BoS Foundation Paper 1, Ch 4 "Inventories", §2 (i) table_
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