Stock valuation

If the closing stock of the previous year is overstated, then the net income to that extent is also overstated, as we show Closing stock to the credit side of the trading account.

Now the previous years closing stock, becomes the opening stock of the subsequent year.  this is shown on the debit side of the Trading account.  that's the reason that the net income will get reduced to the extent opening stock is overstated.

When you are overstating (shown at higher value) Opening Stock, the cost of goods sold increases i.e the expenses increases, there by your profit decreases and hence your income will be understated.