A firm earns a profit in last three years as follows :
| 2020 - 21 | Rs. 75,000 |
| 2019 - 20 | Rs. 1,20,000 |
| 2018 - 19 | Rs. 50,000 |
Additional Information :-
Closing stock of 2020 - 21 was undervalued by Rs. 10,000.
Calculate the Average Profit.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs. 85,000
Before profits are averaged, each year's profit must be corrected for any error. The closing stock of 2020-21 was undervalued by Rs. 10,000. A lower closing stock shows a lower profit, so the profit of 2020-21 is understated by Rs. 10,000 and must be raised.
Corrected profit of 2020-21 = Rs. 75,000 + Rs. 10,000 = Rs. 85,000
Total profit of the three years = Rs. 85,000 + Rs. 1,20,000 + Rs. 50,000 = Rs. 2,55,000
Average profit = Rs. 2,55,000 ÷ 3 = Rs. 85,000