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Hello, 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.
F3 Practice test 1, q 36
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