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After calculating your company’s profit for 2003, you discover that
a) A non-current asset costing £50,000 has been included in the purchases account
b) Stationery costing £10,000 has been inclued as closing inventory of raw materials, instead of inventtory of stationery. The two errors have the effect of
A) Understating gross profit by £40,000 and understating net profit by £50,000
B) Understating both gross profit and net profit by £40,000
C) Understating gross profit by £60,000 and net profit by £50,000
D) Overstating both gross profit and net profit by £60,000.I think that the solution is Understanding gross profit by £40,000 and understanding net profit by 30,000 ¿¿??
Anyone can explain why the correct answer is A? I do not understand why net profit is understated by 50’000
Many thanks in advance
The net profit is understated by £50,000 because the only error affecting the net profit is the incorrect inclusion of the capital expenditure in purchases.
Whereas it was incorrect to include the inventory of stationery in the gross profit calculation (hence the understatement of gross profit by £40,000), it is not incorrect to include the inventory of stationery in a net profit calculation.
So the net profit is only affected by the first error (therefore understated by £50,000).
Hope this helps.
Check out https://www.tenjin.ie/search/ACCA_F3 for free practise opportunities and explanations like this one.
Sorry, thinking about it I am still confused…
By Including the stationery expense as closing inventory by mistake, we are reducing the cost of sales, so the impact of 50000 expenses is reduced by 10000. Therefore the effect on gross profit is “understated by 40,000”. I understand that. But, in relation to the net profit, the fact of not including the stationery expense is that we are not reducing the net profit, but we should. Therefore it can not be understated by 10000 more. I understand that it would be understated by 10000 less than the gross profit, as we have not deduct this expense.
If net profit is equal to gross profit less expenses…. That means that the net profit should be the gross profit, which is understated by 40000, less expenses by 10000. So the net profit, I understand, that is understated by 30000, not by 50000.
What I am doing wrongly?I found this through internet. Someone arrived to the same conclusion ?¿
He wrote:
The correct answer in the book is A, which at a glance might seem obvious, but here is my problem. Both items are included in cost of sales, so you take the £50k out of purchases and the £10k out of closing inventory, this will reduce your costs by £40k and therefore increase your Gross profit by £40k. Fine.But when you apply the £10k charge to the income statement for purchases the net proifit difference comes out at £30k not £50k, below I give two quick P&L examples
Inc Errors Corrections
Sales 750,000 Sales 750,000
Opening Inventory 40,000 Open Inv 40,000
Purchases 450,000 Purchases 400,000 (non-current asset taken out)
Closing inventory (30,000) Closing Inv (20,000) (stationery taken out)Cost of Sales 460,000 COS 420,000
Gross Profit 260,000 GP 300,000Wages 100,000 Wages 100,000
Admin Exps 25,000 Admin Exps 25,000
Depreciation 15,000 Depn 15,000
Stationery 10,000Net Profit 120,000 Net Profit 150,000 – £30,000 DIFFERENCE NOT £50
Is it me or am I missing the point!!!! Help!!!!!
In relation to the example on the internet that you found, the numbers as presented just don’t add up to the net profit figure included.
In relation to the ‘Incl errors’ column:
GP 260
Wages (100)
Admin ( 25)
Deprec ( 15)
Stationery ( 10)
Net profit is 110, not 120 as you have shown above.Similarly, in the ‘Corrections’ column:
GP 300
Wages (100)
Admin ( 25)
Deprec (15)
Net profit is 160, not 150 as you have shown above.Overall difference on net profit is 160 – 110 = 50.
Hello,
Yes, you are rigth! I finally understood it. In fact it is very simple… I think I just needed a brake to think more clearly.
Many thanks for your help. It has been very useful.I would have thought that the correct answer was a because:
removing the non current assets cost of 40,000 from purchases (part of cost of sales) would increase gross profit by the same amount (therefore it is understated)
And Stationery would come under sundry expenses, which are only deducted after gross profit is calculated, which means an additional 10,000 is deducted from the cost of sales calculation and is subtracted after the gross profit meaning the net profit was understated by an additional 10,000.
Revenue X
COS:
Opening Inventory: X
Purchases (- NCA incorrectly DR to Purchases)
Closing Inventory (-stationery incorrectly incl) (X)Gross Profit (Rev-COS) x (As COS was overstated, Gross profit will be understated by 40,000)
Sundry Expenses X
Net Profit X
(As Closing inventory was overstated, and sundry expenses understated Net profit will have also been understated by an additional 10,000).
Correct me if I’m wrong
Why 1st error is effecting the net profit ?
they are pruchases they should be included in COS !The suspense account shows a debit balance of $100. What could this balance be due to ?
A Entering $50 received from A turner on the debit side of A Turner’s account
B Entering $50 received from A turner on the credit side of A Turner’s account
C Undercasting the sales day book by $100
D Undercasting the purchases account by $100Can any one help me why the answer is option D ?
A suspense account shows a credit balance of $130. Which of the following could be due to ?
A Omitting a sale of $130 from the sales ledger
B Recording a purchase of $130 twice in the purchases account
C Failing to write off a bad debt of $130
D Recording an electricity bill paid of $65 by debiting the bank account and crediting the electricity accountCan any one tell me why the answer is option B ?
We need to credit suspense account by 100
A. To correct the entry we will credit A turner account with 100 and DEBIT suspense, so this wrong
B. this is a correct entry
C.to correct the sales book we will credit sales by 100 and DEBIT suspense, so this is wrong
D. To correct the purchases book we will debit purchases and CREDIT suspense. This is correct
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