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Hello Mr. Moffat, would you please help to clarify?
According to the BPP interactive text, cost of inventory stolen does not form part of cost of sales. Rather, it is expensed in the Profit and Loss account. However, in the SFP under Current Assets heading, the inventory value is the amount of inventory actually left.
Following this, the Gross profit is not affected while the Net profit is affected if the theft is not covered by insurance.
Question: If the gross profit percentage in Lock Co was lower than the gross profit percentage in Hinge Co andyou discovered that both companies sell one product and use the same mark-up to set sales prices, what would be your conclusion about the level of theft of inventories in each company?
Answer by ACCA:
If the gross profit percentage in Lock Co was lower than the gross profit percentage in Hinge Co the conclusion would be that there seems to be more theft of inventories in Lock Co than Hinge Co.Theft of inventories reduces the gross profit percentage as it increases cost of sales but does not generate any revenue.
Source:
ACCA
https://educationhub.accaglobal.com
F3 Practice test 1, q 36The gross profit % itself is simply the gross profit as a % of the sales.
In calculating the cost of sales, then normally we take the opening inventory plus the purchases, less the closing inventory.
If the closing inventory is lower than it should be (because of theft), then the cost of sales will be higher that it really should be and therefore the gross profit will be lower and therefore the gross profit % will be lower.
BPP are quite correct, that having discovered that there is a theft, the gross profit should be adjusted and the theft should be accounted for as an expense (and therefore affecting the net profit). However until this is realised and dealt with, the ACCA answer is correct.
I do go through this in my free lectures. The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass Paper F3 well 🙂 )
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