Question

1. Alpha Ltd. Has the following details as on March 31, 2016                                 

	2016	2015
Sales	2250	2000
Opening stock	30	20
Production	2460	2000
Closing stock	400	30
Cost of goods sold (opening stock + production – Closing stock)	2090	1990
Other expenses	80	50
Net Profit/Loss	80	(40)

1. Suppose the accountant has wrongly computed the closing stock while adding stocks, to an extent of 30%. What would be the impact on the profit of the Alpha Ltd compare to the previous year (2015)?                                                        [5]
2. Suppose the error was not rectified in the current year (31^st March 2016). Next year Alpha has produced Rs.2650 and sold goods for Rs.2800. It has a closing stock of Rs.240 and there is no error in computing the closing stock value. What will be the reported profit for the year ending 31^st March 2017?                                                [5]

Answer 1

a. Overvaluation of closing stock results in lower cost of goods sold for 2016. Overvaluation of closing stock results in overvaluation of profit.

In this case, accountant wrongly computed closing stock by adding stock to the extent of 30% of stock , so the overvaluation by an amount=

Stock(with overvaluation)= 400

Stock overvalued by = 400× 30/130 = 92.30

Actual stock = 400 less 92.30 = 307.70

Therefore the profit for the year 2016 is overvalued by an amount is 92.30

Loss for 2016 =

Sales	2250
Less: cost of goods sold =30 +2460 -307.7	2182.30
Less : expenses	80
Loss	12.3

Company also made loss in the year 2016, but reduction in loss as compared to year 2015.  

b) If error made in 2016 is not rectified then opening stock will overvalued in current year 2017 that will reduce profit in 2017. It means profit will be reduced by an amount is 92.30

If error not rectified

Sales	Rs.2800
Less : cost of goods sold = 400+ 2650 - 240	Rs.2810
(Opening stock + production - closing stock)
Loss	Rs.10

If error rectified

Sales	Rs.2800
Less : cost of goods sold	Rs.2717.70
(307.70 + 2650 - 240)
Profit	Rs.82.30

Error in 2016 will overvalue profit by 92.30. If error not rectified, profit for the year 2017 will reduced by 92.30. Error made in 2016 will compensated in 2017.