11 Dexon (6/08)

point number 1 100 / 130 The question tells us that goods are sold at 30%mark up. In the equation Cost + Profit = Selling price we can put in the figure for profit ( 30% ) and therefore also cost ( 100% – because mark up is a percentage based on cost )

That means that for every $ 130 included in sales ( wrongly recorded sales! ) 30 of that 130 is the profit element and 100 of the 130 is the cost element.

That’s why 2,600 sales is multiplied by 100 / 130 – to get the cost value of these goods which have been incorrectly accounted for as sales

Point number 2 – 96,700 is shown in the question as being the retained profit for the year but companies should stop their calculations of profit for the year in the Income Statement at the line “Profit after tax”. the question is asking us to recalculate the figure for “profit after tax” so we need to work back up from the draft 96,700 to arrive at the revised figure. Now that revision of 50,800 fits into the Statement of Changes in Equity in which you will find the dividend as an appropriation of profits ( correct treatment ) as distinct from an expense in the Income Statement ( incorrect treatment ).

The question states that the “dividends have been correctly accounted for in the above statement of financial position” but it does NOT say that they have been correctly accounted for in the Statement of Income, nor of Comprehensive Income, nor of Changes in Equity. Just that they are correctly reflected within the Statement of Financial Position ( Balance Sheet! )

Hi

No, dividends paid are an appropriation of profits and are separately disclosed in the Statement of Changes in Equity.

Dividends received ARE shown in the income statement