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The draft accounts of Anthea Company for the year ended 31 Dec 20×9 include the following: Revenue $80000 Gross Profit $2000.It was subsequently discovered that revenue had been understated by 10000 and closing inventory overstated by $5000.After correction of these errors the gross profit percentage will Be?
Hiya,
Okay leme help u on this…
Revenue: $80,000
Gross Profit: $2000
Cost of Sales: ??To get cost of sales, subtract Gross Profit ($2000) from Revenue ($80,000).
i.e $80,000 – $2,000 = $78,000When inventory is overstated, it will result in Cost of Sales being understated and hence having high Gross Profit.
Adjustments
Revenue: $80,000 + $10,000 = $90,000
Cost of Sales:$78,000 + $5000= $83,000(Using the rule above, it appears that cost of sales were understated by having overstated closing inventory, so we reverse the effect hence adding $5000 back to Cost of Sales)
Revised Income Statement
Revenue: $90,000
Cost of Sales: $83,000
Gross Profit: $7,000Gross Profit % = Gross profit / total revenue x 100
$7,000 / $90,000 x 100 = 7.78%Hope that helps
Dizzy Cats answer is correct (even though he should not be answering in the Ask the ACCA Tutor Forum 🙂 )
However, are you sure you typed the question correctly and that the gross profit was not 20,000?
Anyway, it should be clear from Dizzy Cats answer how to approach it 🙂
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