WAEC Accounting 2019 Paper

Concept:The value of closing stock has an inverse relationship with the cost of goods sold, which ultimately affects gross profit.Explanation:The cost of goods sold is calculated using the formula:$$\text{COGS} = \text{Opening Stock} + \text{Purchases} - \text{Closing Stock}$$When closing stock is undervalued, its recorded value is lower than the actual value.Since closing stock is subtracted in the formula, a lower closing stock means a smaller amount is subtracted from opening stock and purchases.As a result, the cost of goods sold becomes overstated.Gross profit is calculated as:$$\text{Gross Profit} = \text{Sales} - \text{COGS}$$If the cost of goods sold is overstated, the gross profit will be understated.Answer:Therefore, the cost of goods sold would be overstated and the gross profit would be understated.