Inventory and Profit

[Jeremy007]

I came across this question and found it hard to understand even with the answer provided. Could anyone kindly explain how to go about it?

Question: A business received a delivery of goods on 29 june 2006, which was included in inventory at 30 June 2006. The invoice for the goods was recorded in July 2006.
What effect will this have on the business?

Answer given is "Profit for the year ended 30 June 2006 will be overstated".

In addition, I've made the following observations but not quite sure whether they are correct. Please do give me some feedback.
Thanks a lot in advance

the impact of closing inventory and open inventory on current year’s profit:

With sales, purchases and opening inventory kept constant
Closing inventory > (increase)
Cost of Goods Sold < (decrease)
Profits>

With other elements kept constant,
Opening inventory >
Cost of Goods Sold >
Profits <

[Acid]

I came across this question and found it hard to understand even with the answer provided. Could anyone kindly explain how to go about it?

Question: A business received a delivery of goods on 29 june 2006, which was included in inventory at 30 June 2006. The invoice for the goods was recorded in July 2006.
What effect will this have on the business?

Answer given is "Profit for the year ended 30 June 2006 will be overstated".

In addition, I've made the following observations but not quite sure whether they are correct. Please do give me some feedback.
Thanks a lot in advance

the impact of closing inventory and open inventory on current year’s profit:

With sales, purchases and opening inventory kept constant
Closing inventory > (increase)
Cost of Goods Sold < (decrease)
Profits>

With other elements kept constant,
Opening inventory >
Cost of Goods Sold >
Profits <
Hi

I think the reason profit would be overstated is because the purchase invoice is not recorded in the current year i.e. a reduction in expense + the closing inventory has increased which will reduce the cost of sales in the income statement. So it will have a two fold impact on the income statement :

1. Expense is not recorded against the profits of the year ( purchase invoice has not been recorded )
2. Closing Inventory increased at year end , decreasing the cost of sales . E.g. If Purchase for year is $10 and cl.inventory is $5 then Cost of sales is $010-5=5 but If Cl.inventory increase to 8 then 10-8 would give us a cost of sale of 2 .

I hope this helps.

[Jeremy007]

Thanks so much for your clear and detailed explanations, which has cleared all my doubts now. By the way, can you possibly comment on my "tentative conclusions" regarding "inventory's impact on profit" as well?

[Acid]

Thanks so much for your clear and detailed explanations, which has cleared all my doubts now. By the way, can you possibly comment on my "tentative conclusions" regarding "inventory's impact on profit" as well?


Yes your tentative conclusions are right.

Stay in touch.