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Under-statement of closing work in progress in the period will
- a)Understate cost of goods manufactured in that period.
- b)Overstate current assets.
- c)Overstate gross profit from sales in that period.
- d)Understate net income in that period.
Correct answer is option 'D'. Can you explain this answer?
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Verified Answer
Under-statement of closing work in progress in the period willa)Unders...
Work-in-progress is a measure of the costs of goods that have been partially completed but are not yet ready for sale. It is included in the cost of goods sold, which is a major expense on the income statement. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit and net income.
Here is a more detailed explanation of each option:
- A. Understate cost of goods manufactured in that period. This is incorrect because work-in-progress is included in the cost of goods manufactured. When work-in-progress is understated, the cost of goods manufactured will also be understated.
- B. Overstate current assets. This is incorrect because work-in-progress is not a current asset. It is an asset that is used in the production of goods and services.
- C. Overstate gross profit from sales in that period. This is incorrect because gross profit is calculated by subtracting the cost of goods sold from sales. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit.
- D. Understate net income in that period. This is correct because net income is calculated by subtracting expenses from revenues. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit and net income.
Most Upvoted Answer
Under-statement of closing work in progress in the period willa)Unders...
Understatement of Closing Work in Progress (WIP) in the Period
- Closing Work in Progress (WIP) refers to partially completed goods that are still in the production process at the end of an accounting period.
- The value of WIP represents the cost of raw materials, labor, and overheads incurred in the production process up to the end of the period.
- WIP is a current asset that is carried forward to the next period and is included in the opening balance of Work in Progress for the next period.
- Understatement of WIP occurs when the value of WIP at the end of the period is lower than its actual value.
Impact of Understatement of WIP
- Understatement of WIP will result in understating the cost of goods manufactured in that period.
- This is because the cost of WIP is included in the cost of goods manufactured, and if the value of WIP is understated, the cost of goods manufactured will also be understated.
- Understatement of cost of goods manufactured will result in overstatement of gross profit from sales in that period.
- This is because gross profit is calculated as the difference between sales revenue and cost of goods sold, and if the cost of goods sold is understated, the gross profit will be overstated.
- However, this overstatement of gross profit will be offset by the understatement of net income in that period.
- This is because net income is calculated as gross profit minus operating expenses and taxes, and if the gross profit is overstated, the net income will be understated.
- Therefore, the correct answer is option 'D', which states that understatement of WIP will understate net income in that period.
- Closing Work in Progress (WIP) refers to partially completed goods that are still in the production process at the end of an accounting period.
- The value of WIP represents the cost of raw materials, labor, and overheads incurred in the production process up to the end of the period.
- WIP is a current asset that is carried forward to the next period and is included in the opening balance of Work in Progress for the next period.
- Understatement of WIP occurs when the value of WIP at the end of the period is lower than its actual value.
Impact of Understatement of WIP
- Understatement of WIP will result in understating the cost of goods manufactured in that period.
- This is because the cost of WIP is included in the cost of goods manufactured, and if the value of WIP is understated, the cost of goods manufactured will also be understated.
- Understatement of cost of goods manufactured will result in overstatement of gross profit from sales in that period.
- This is because gross profit is calculated as the difference between sales revenue and cost of goods sold, and if the cost of goods sold is understated, the gross profit will be overstated.
- However, this overstatement of gross profit will be offset by the understatement of net income in that period.
- This is because net income is calculated as gross profit minus operating expenses and taxes, and if the gross profit is overstated, the net income will be understated.
- Therefore, the correct answer is option 'D', which states that understatement of WIP will understate net income in that period.
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Community Answer
Under-statement of closing work in progress in the period willa)Unders...
Work-in-progress is a measure of the costs of goods that have been partially completed but are not yet ready for sale. It is included in the cost of goods sold, which is a major expense on the income statement. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit and net income.
Here is a more detailed explanation of each option:
- A. Understate cost of goods manufactured in that period. This is incorrect because work-in-progress is included in the cost of goods manufactured. When work-in-progress is understated, the cost of goods manufactured will also be understated.
- B. Overstate current assets. This is incorrect because work-in-progress is not a current asset. It is an asset that is used in the production of goods and services.
- C. Overstate gross profit from sales in that period. This is incorrect because gross profit is calculated by subtracting the cost of goods sold from sales. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit.
- D. Understate net income in that period. This is correct because net income is calculated by subtracting expenses from revenues. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit and net income.
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Under-statement of closing work in progress in the period willa)Understate cost of goods manufactured in that period.b)Overstate current assets.c)Overstate gross profit from sales in that period.d)Understate net income in that period.Correct answer is option 'D'. Can you explain this answer?
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