Question

If stock is undervalued the effect will be

• A. Profit will be overstated
• B. Price of share will be increased
• C. Secret reserve will be created
• D. General reserve will be created

Answer 1

Answer:

C. Secret reserve will be created

Stock undervaluation means valuing closing stock less than its actual market or cost value. This reduces the reported profit in the Profit & Loss Account. The difference between the actual value of stock and the undervalued stock acts as a hidden or secret reserve. Secret reserves help the business to strengthen its financial position without showing it openly. Other options: Profit overstated: Incorrect — profit is understated, not overstated. Price of shares increased: No direct effect. General reserve created: Not automatically — only secret reserve is formed.