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The senior manager is suspicious of a local manager’s account and thinks that the profit may have been overstated.
Which of the following would be a plausible explanation of an overstatement of proft
A. Delaying payments to payables
B. Shortening the useful economic life of a non-current asset
C. Overstatement of a prepayment
D. Overstatement of an accrualThe answer said C but no explanation. I don’t understand how the reduction in the useful life of an NCA reduces profitability.
You should know from Paper F3 (or whatever exempted you) that when we calculate the expense for the year we take the cash that was paid less any amount that was prepaid.
If we have taken too high a prepayment (because it was overstated) then we will end up showing too low an expense. If the expense is too low then we will be showing too high a profit (i.e. the profit will be overstated).
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