Concept:An overstated closing stock lowers cost of sales and raises gross profit in the trading account.
Explanation:Closing stock is the value of unsold goods at the end of the period.
It appears on the credit side of the trading account.
To compute cost of sales, the closing stock is subtracted from the cost of goods available for sale:
Cost of Sales=Opening Stock+Purchases−Closing StockWhen closing stock is overstated, the figure subtracted is larger than the true value.
Therefore, cost of sales becomes understated, i.e., reduced.
Gross profit is found by deducting cost of sales from sales:
Gross Profit=Sales−Cost of SalesIf cost of sales falls, gross profit rises.
Thus, an overstated closing stock reduces cost of sales and increases gross profit.
Answer:A. cost of sales and increase gross profit