passwella.
Menu

JAMB Principles of Accounts 1998 Question 9

Question 9

Final Accounts of a Sole Trader

If the inventory at the end of the current year is understated and the error is not caught during the following year, the effect is to

  1. A.overstate income this year and understate in next year
  2. B.understate income this year and overstate in next year
  3. C.understate this year's income with no effect on next year's
  4. D.overstate the income for the two-year period.
Show the answer and explanation

Answer: B (understate income this year and overstate in next year)

Explanation

Closing stock too low → cost of sales too high → this year's profit too low. It becomes next year's opening stock, so next year's profit is too high.