Answer:
4. understated by $64000
Explanation:
Purchase cost increases the cost of goods sold and reduces profit before tax (PBT) income.
Similarly, closing inventory balance increases profits before tax income.
In the given case, purchase cost is understated by $40,000 less $4000 i.e $36000. This would overstate the profits by $ 36000. Whereas, omission of closing inventory from records of $100,000 would understate profits by $100,000.
Thus, the net effect of the two mentioned omissions and errors would lead to understated profits by $100,000 less $36000 i.e by $64,000.
