Provide by numerically stating, how the ending inventory of a company could be understated. Suggest in...

Provide by numerically stating, how the ending inventory of a company could be understated. Suggest in which possible scenario this might be practiced

Expert Solution

Inventory can be understated in the following ways:

1. By increasing the cost of opening inventory:

For example: if opening value of inventory is 5000, purchases are 2000 and cost of goods which are sold sales are for 4000. then the closing value of inventory will be 3000.

But if we increase the opening cost of inventory from 5000 to 6000 then the closing value of inventory will be 4000.

2. By increasing the cost of goods sold: if in the above example, we increase the cost of sales from 4000 to 6000 and keeping other as same then the value of closing value will be 1000.

3. By reducing the cost of closing inventory: we can also understate the inventory by merely doing revaluation downwards or making some provisions.

When the profits are to be increased for the company then understatement of inventory can be done so that it increases the profit for the company. further in case one is require to report less inventory in the books then the inventories can be understated

ekkarill92 answered 2 years ago

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