CA Foundation Exam > CA Foundation Questions > What are the consequences of undervaluation o...
Start Learning for Free
What are the consequences of undervaluation of closing stock ?
- a)Under reporting of profit
- b)Creation of hidden reserves
- c)Reduction of tax liability
- d)All the these
Correct answer is option 'D'. Can you explain this answer?
Most Upvoted Answer
What are the consequences of undervaluation of closing stock ?a)Under ...
Consequences of Undervaluation of Closing Stock:
Undervaluation of closing stock can have several consequences, including:
1. Underreporting of Profit: If the closing stock is undervalued, it will lead to the understatement of the cost of goods sold and overstatement of the gross profit. This will result in an underreporting of profit for the period.
2. Creation of Hidden Reserves: Undervaluation of closing stock can lead to the creation of hidden reserves. This is because the difference between the actual value of closing stock and the undervalued amount will be added to the next year's opening stock. This will result in an artificially inflated opening stock value, which will create a hidden reserve.
3. Reduction of Tax Liability: Undervaluation of closing stock can reduce the tax liability of the business. This is because the cost of goods sold will be lower, resulting in a lower taxable profit. However, this is not a desirable practice as it can lead to penalties and fines for tax evasion.
4. All of the Above: Undervaluation of closing stock can have all of the above consequences, i.e., underreporting of profit, creation of hidden reserves, and reduction of tax liability.
In conclusion, it is important for businesses to value their closing stock accurately to avoid these consequences and ensure compliance with accounting and tax regulations. Any errors or misstatements should be corrected promptly to avoid any legal or financial implications.
Undervaluation of closing stock can have several consequences, including:
1. Underreporting of Profit: If the closing stock is undervalued, it will lead to the understatement of the cost of goods sold and overstatement of the gross profit. This will result in an underreporting of profit for the period.
2. Creation of Hidden Reserves: Undervaluation of closing stock can lead to the creation of hidden reserves. This is because the difference between the actual value of closing stock and the undervalued amount will be added to the next year's opening stock. This will result in an artificially inflated opening stock value, which will create a hidden reserve.
3. Reduction of Tax Liability: Undervaluation of closing stock can reduce the tax liability of the business. This is because the cost of goods sold will be lower, resulting in a lower taxable profit. However, this is not a desirable practice as it can lead to penalties and fines for tax evasion.
4. All of the Above: Undervaluation of closing stock can have all of the above consequences, i.e., underreporting of profit, creation of hidden reserves, and reduction of tax liability.
In conclusion, it is important for businesses to value their closing stock accurately to avoid these consequences and ensure compliance with accounting and tax regulations. Any errors or misstatements should be corrected promptly to avoid any legal or financial implications.
Free Test
FREE
| Start Free Test |
Community Answer
What are the consequences of undervaluation of closing stock ?a)Under ...
Because undervaluation of closing stock leads to lower gross profit which creates hidden reserves with thr firm and undercasting of profit will have direct impact on reduction of tax liability hence option D is correct answer.
|
Explore Courses for CA Foundation exam
|
|
Similar CA Foundation Doubts
Top Courses for CA FoundationView all
What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer?
Question Description
What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer? for CA Foundation 2025 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for CA Foundation 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer?.
What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer? for CA Foundation 2025 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for CA Foundation 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer?.
Solutions for What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer? in English & in Hindi are available as part of our courses for CA Foundation.
Download more important topics, notes, lectures and mock test series for CA Foundation Exam by signing up for free.
Here you can find the meaning of What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer? defined & explained in the simplest way possible. Besides giving the explanation of
What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer?, a detailed solution for What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer? has been provided alongside types of What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer? theory, EduRev gives you an
ample number of questions to practice What are the consequences of undervaluation of closing stock ?a)Under reporting of profitb)Creation of hidden reservesc)Reduction of tax liabilityd)All the theseCorrect answer is option 'D'. Can you explain this answer? tests, examples and also practice CA Foundation tests.
|
|
Explore Courses for CA Foundation exam
|
|
Signup for Free!
Signup to see your scores go up within 7 days! Learn & Practice with 1000+ FREE Notes, Videos & Tests.
|
© EduRev
|
Education Revolution
|
|
Signup to see your scores
go up within 7 days!
Access 1000+ FREE Docs, Videos and Tests
Takes less than 10 seconds to signup