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Inventory errors related to closing inventory will invariably affect two financial years.
If the entity misstates the closing inventory in the current year, this misstatement will be
carried forward to the next year. This is because if the current year’s profit is understated
due to an understatement of the closing inventory value, the next year’s profit will be
overstated by the same amount. It is important to note that understating the opening
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inventory values results in a lower cost of goods sold, hence, a higher profit figure.
Over a span of two years, the effect of the inventory error will automatically cancel
out. In summary, the impact of inventory errors on the statement of profit or loss can be
encapsulated as follows:r
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Inventory error Cost of goods sold Gross profit Net profit

Understate ending inventory Overstated Understated Understated
Overstate ending inventory Understated Overstated Overstated
Understate opening inventory Understated Overstated Overstated
Overstate opening inventory Overstated Understated Understated

Activity 2.3
Read various sources including online on how to calculate inventory error

Example 2.8
The following is a summarised statement of profit or loss for Ndindi Traders for two
years:
Details 31 Dec. 2022 31 Dec. 2023
st
st
TZS TZS TZS TZS
Sales 800,000 1,200,000
Cost of goods sold:

Opening inventory 100,000 200,000
Add: Purchases 720,000 980,000
Cost of goods available for sale 820,000 1,180,000
Less: Closing inventory 200,000 620,000 180,000 1,000,000

Goss profit 180,000 200,000
Less: Operating expenses 80,000 140,000
Operating profit 100,000 60,000

Student’s Book Form Five
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