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Hallo,
Why in the following example net assets do not change, is it because neither the materials, which are expense in this case, neither purchases which as well are counted as net assets?
Materials used to repair some machinery have been treated as purchases in the draft account. Correcting this error will have what effect on gross profit and net assets?
Answer:
Gross profit – increase
Net assets – no change
The correction will increase expenses and reduce purchases. Thus gross profit will increase and net assets not change.Thank you!
Are you sure you have typed the question correctly and that it does not say that net profit will not change (rather than net assets)?
Gross profit will increase (because fewer purchases will mean lower cost of sales and therefore higher gross profit); and net profit (not net assets) will not change because although gross profit is higher, repairs expense will be higher as well.
However, net assets will not change either because neither purchases nor repairs will affect net assets.
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