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The accountant at investotech discovered the following errors after calculating the company’s profit for 20×3:
a) Stationery costing $10,000 has been included as closing inventory of raw materials, instead of stationery expenses.
b) A non current asset costing $50,000 has been included in the purchase account.Here, I have no problem on a, but i failed to understand the impact of b on Net profit and gross profit. Please provide me working depending on a scenario.Thank you.
The stationery error will affect the gross profit (because it is not raw materials), but it will not affect the net profit (it will reduce the stationery expense instead of reducing the cost of materials)
The non-current asset error has two separate effects. Firstly, the actual purchase of the asset should not appear in the income statement at all – so when it is removed both gross profit and net profit will increase. However it will then need to be depreciated and this will reduce the net profit.
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