Pups calculation and treatment in the income statement

No! In your example we have some inconsistencies 1) When P sells goods to S worth $40,000 that suggests that the sale price is $40,000. For $40,000 to be interpreted as the cost, the question would read "P sold goods to S that had cost P $40,000 ...... " 2) If the sales price of these goods is $40,000 and that figure includes a mark-up of 20%, then the cost price to P of those goods must have been 100/120 x $40,000 = $33,333 3) The cancellation of the sale (whether it was a sale for $40,000 or for $48,000) is correct - reduce revenue by the sale price ($40,000 or $48,000 whichever one is the correct sale price) and reduce also cost of sales by that same amount 4) Then add to cost of sales the $8,000 (if the total sale price was $48,000) or by $6,667 - where the total sale price was $40,000 Is that ok?

Thanks Mike. It certainly helped me understand the concept well :)

You're welcome