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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) 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 expensesAnswer. Understatement of gross profit by $40,000 and understatement of net profit by $30,000
my question is why the net profit is affected? we have already deducted 10000 from cost of sale because stationery of 10000 was accidently included in closing inventory (opening inventory + purchases – closing inventory).
Since 10k expense was already deducted, although it was wrong, why we deduct the same expense again from net profit?
(a) removing the non-current asset reduces the cost of sales and so increases the gross profit and the net profit by 40,000.
(b) removing the stationary from the inventory raw materials reduces the cost of sales and so increases the gross profit by 10,000.
However instead it increases the stationary expense which reduces the net profit by 10,000.
So the net effect is that the gross profit should be higher by 40,000 + 10,000 = 50,000, and the net profit should be higher by 40,000 – 10,000 = 30,000.
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