## Special Adjustment: Undervalued Opening Inventory

Sometimes the question states that opening inventory was undervalued (e.g., by ₹24,000). This affects comparability between years.

### Accounting Entry to correct the undervaluation

```

Opening Inventory A/c Dr 24,000

To Opening P&L Reserve 24,000

(Being undervaluation of opening stock corrected)

```

### Impact on Cash Flow Statement

Effect	Adjustment needed
P&L Reserve (opening) increases by ₹24,000	Add ₹24,000 to opening P&L Reserve before computing transfer to CT
Inventory (opening) increases by ₹24,000	Adjust opening inventory figure for WC calculation
No cash flow — purely a restatement	Do NOT include as a cash flow anywhere

### Revised working-capital calculation

```

Inventory as per balance sheet (closing) ×××

Less: Restated opening inventory ×××

────────

Increase/Decrease in Inventory (adjusted) ×××

```

> Examiner note: Illus. 18 and Illus. 19 together cover almost all adjustments under the indirect method. Study both comprehensively.

### Tax with no information given

If tax is not mentioned and nothing is said about whether it is paid:

Assume tax shown as Opening/Closing provision in balance sheet is the amount paid → reconstruct Provision for Tax T-account.
If still ambiguous, the instruction `jo op hai usko pay kardo` (pay the opening balance) and `CCS hai usko P&L mein book karlo` (book the closing provision from P&L) applies.

Worked example

### Example 1

Undervalued Inventory — Effect on Cash Flow (Illustration context)

Given: Opening inventory was undervalued by ₹24,000.

Correcting journal entry:

```

Opening Inventory Dr 24,000

To P&L Reserve (Opening) 24,000

```

In the Balance Sheet (restated):

Impact on CF Statement:

The increase in P&L Reserve (+₹24,000) appears in operating activities (as part of reserve transfer to PBT).
The adjusted closing inventory figure is: ₹11,50,000 (as per B/S)
The adjusted opening inventory: ₹11,34,000 (restated)
Change in inventory = ₹11,50,000 − ₹11,34,000 = ₹16,000 increase → deducted in WC changes.

No separate cash flow entry for the restatement itself — it is a non-cash correction.

⚠️ Common exam mistakes

Treating the undervaluation correction as a cash inflow in operating activities — it is a non-cash accounting restatement and has no cash flow impact.
Forgetting to restate the opening inventory figure when computing working-capital changes — using the original (wrong) inventory figure will give incorrect change in inventory.
Not adjusting the opening P&L Reserve for the correction, leading to wrong PBT reconstruction.
When tax information is absent, neither paying the opening provision nor booking the closing provision — the T-account approach (pay opening balance, create closing provision from P&L) is the standard exam technique.

Reference:

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Cash Flow Statement (AS 3) — Undervalued/Restated Opening Inventory Adjustment

Worked example