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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 expensesWhat 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)
Here I am not sure why the answer is (A) because if 10000 has already been deducted from the 50000 to arrive at 40000 gross profit then why is it deducted again for net?
There are two problems caused by error (b).
Firstly it should not have been in inventory of raw materials, which makes the cost of sales higher and therefore the gross profit (and therefore automatically the net profit as well) lower by 10,000.
Secondly it should have been recorded as an expense (for stationery) and so an extra expense of 10,000 makes the net profit an extra 10,000 lower.
your firstly bit is what i thought but your secondly im not sure why its deducted again because it says it was included in closing inventory instead of expenses not both.. sorry for hassling you 🙂
Yes – it was included in closing inventory. That was wrong and I wrote how to correct it.
However, separately it should have been recorded as an expense. It had not been – that was wrong, and so I wrote how to correct that also.
Hi Sir, I completely agreed with your answer “Firstly it should not have been in inventory of raw materials, which makes the cost of sales higher and therefore the gross profit (and therefore automatically the net profit as well) lower by 10,000”. However, the question is “What is the effect of THESE ERRORS”, Your answer is “Yes – it was included in the closing inventory. That was wrong and I wrote how to correct it”. I could not understand why we need to correct it, we just need to find the effect of wrong. So I could not understand why the profit for the year by 30,000.
Thanks for your help!We need to know how to correct it in order to know that the effect of the error was on the profits.
The post I was replying to was only asking about the effect of the stationery error.
There is also the other error to deal with.
Thank you a lot, Sir. I appreciate your answer. This is the best ACCA website I have ever found.
Sorry for bothering Sir!
However, I don’t know why some posts have a “REPLY” sign, others without a “REPLY” sign. I viewed those posts, but I couldn’t comment on them. Can you explain it to me? Or I need to donate to comment on all of the posts, don’t I?It is because this forum is just for asking questions of the tutor (the other FA forum is for students to help each other).
When a question has been answered (and the person posting the question has confirmed that they understood the answer) then the thread is closed, which means then it cannot be replied to.
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