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Profit figures are reflected by an Increase than actuals.
(here Overvaluation is only a mistake/error to be rectified)
(This may be treated as Window Dressing, if the Over-valuation is purposefully done)
and tax amount would be overvalued on net profit
The impacts will be as follows :
1. Closing stock figure in the current assets of balance sheet will be over-stated.
2. Cost of Sales for the period will be under-stated.
3. Gross Profit for the period will be over-stated.
4. Net Profit will be overstated or Net Loss will be under-stated, etc.
A mistake in over valuation of closing stock can trigger a number of further errors in the financial statements. The degree of the error and whether it is material or not depends upon the degree to which the stock has been over valued. Consequently, a material error can render the financial statements useless for the users of financial statement owing to the following consequential errors;
Overstated Gross Margin: The overstatement of closing stock will overstate the Gross Margin and depress the cost of sales
Overstated Net Profit: The error would result in overstatement of Net Profit.
Taxation: The error will be pervasive enough to render the Tax Expense stated in the Statement of Comprehensive Income to be overstated. Consequently the Tax Liability exhibiting in the Statement of Financial Position would also be overstated.
Equity: Equity would be unfairly overstated.
As discussed, a simple mistake of over valuation of closing stock can have a very pervasive effect on the financial statements and unless the error is immaterial, the financial statements are rendered useless.
In case of ending stocks are over valued, it will increase current assets side of balance sheet. Ultimately it will called window dressing.
Good answers
If closing stck is overstated , its effect on
Net profit is overstated means tax is also over stated paid
CGS under stated , Current asset overstated
