Introduction:
Valuation of closing stock is an important aspect of accounting that directly affects the profit of a business. The overvaluation of closing stock can have a significant impact on the financial statements of a company. In this response, we will discuss how the overvaluation of closing stock affects the profit of a business.

Decrease in profit:
When the closing stock is overvalued, it results in an increase in the cost of goods sold and a decrease in the gross profit. This, in turn, leads to a decrease in the profit of a business. The following are the reasons how overvaluation of closing stock can decrease the profit:

1. Overstated cost of goods sold: When the closing stock is overvalued, it results in an increase in the cost of goods sold. This means that the cost of goods sold is overstated, which leads to a decrease in the gross profit.

2. Lower net realizable value: Overvaluing closing stock can lead to a lower net realizable value. The net realizable value is the amount that a business expects to receive from the sale of its inventory. If the closing stock is overvalued, it can result in a lower net realizable value, which leads to a decrease in the profit of a business.

3. Inaccurate financial statements: Overvaluing closing stock can result in inaccurate financial statements. This can affect the credibility of a business and can lead to a decrease in the profit.

Increase in profit:
Overvaluation of closing stock can also lead to an increase in profit in certain circumstances. The following are the reasons how overvaluation of closing stock can increase the profit:

1. Tax benefits: Overvaluing closing stock can lead to tax benefits for a business. This is because the higher inventory value can result in a lower taxable income, which leads to a decrease in the tax liability.

2. Higher net realizable value: In some cases, overvaluation of closing stock can result in a higher net realizable value. This means that the amount that a business expects to receive from the sale of its inventory is higher, which leads to an increase in the profit.

Conclusion:
In conclusion, the overvaluation of closing stock can both decrease and increase the profit of a business. It is essential to ensure that the closing stock is accurately valued to avoid any negative impact on the financial statements of a company. Accurate valuation of closing stock can help a business to make better decisions and improve its financial performance.