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3)If management overstated the valuation of inventory, would it affect profit for the year?

3)If management overstated the valuation of inventory, would it affect profit for the year?

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The overstated valuation of inventory would affect the profit for the year. If a company overstated its inventory, it will also be overstating its gross profit and net income well as its current assets, total assets, retained earnings, stockholder's equity and all of the related financial ratios. The gross profit and net income are overstated because not enough of the cost of goods available is being charged to the cost of goods sold. Since the overstated amount of inventory at the end of one accounting period becomes the beginning inventory of the following period, the following period,s cost of goods sold will be too high and will result in the period's gross profit and net income being too low.

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