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The accountant at Investotech discovered the following errors after calculating the company’s profit for 20X3:
(a) A non-current asset costing $50,000 has been included in the purchases account
(b) Stationery costing $10,000 has been included as closing inventory of raw materials, instead of stationery expenses
What is the effect of these errors on gross profit and net profit?
A Understatement of gross profit by $40,000 and understatement of net profit by $30,000
B Understatement of both gross profit and net profit by $40,000
C Understatement of gross profit by $60,000 and understatement of net profit by $50,000
D Overstatement of both gross profit and net profit by $60,000 (2 marks)
Answer: A
My question: Isn’t Net profit just the gross profit after deducting tax and interest, why did stationary expense affected net profit?
Net profit is certainly not ever just the gross profit after deducting tax and interest !!!!
Net profit is the gross profit less all the expenses (administrative and selling & distribution).
I suggest that you watch my free lectures before attempting any more questions. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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