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Q. After completing his final accounts, Kevin found that he has understated a prepayment.
How are Kevin’s net profit and capital affected by the correction of error?
Net Profit Capital
A. Increased Increased
B. Increased Decreased
C. Decreased Increased
D. Decreased DecreasedA prepayment says that some of the payment is in respect of the next year. Therefore that would increase this year’s profits.
If you make more profit capital must be higher (ie think of the prepayment as an asset).
Answer A is correct.
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