07-22-2007, 12:25 AM

Hello,

I got stuck on a MCQ while solving the exam kit of FTC for 1.1.

Here is the question

<b><i>After calculating your company's profit for 20X3 you discover that

1.A non-current asset costing $50,000 has been included in the purchases account.

2.Stationary costing $10,000 has been included as closing inventory of raw materials, instead of inventory of office stationary.

The two errors have an effect of

A.Understating gross profit by $40,000 and understating net profit by $50,000.

B.understating both gross profit and net profit by $40,000.

C.understating gross profit by $60,000 and understating net profit by $50,000.

D.overstating both gross profit and net profit by $60,000.</i></b>

I made the following conclusions

Error 1 should understate Gross Profit by $50,000 as the Cost of Sales are overstated by $50,000. Thus Net Profit is also understated by $50,000.

Error 2 should overstate the gross profit by $10,000 as the cost of sales are understated by $10,000.Thus the Net profit is also overstated by $10,000.

Therefore, both Gross profit and net profit are understated by $40,000. So according to my calculations the answer should be <u>B</u>.

But the answers' section says the answer is A. My conclusion about error 1 is correct. But not about error 2.

It says error 2 will only affect the gross profit and have no affect on the net profit. How can that be?

Can someone explain?

I got stuck on a MCQ while solving the exam kit of FTC for 1.1.

Here is the question

<b><i>After calculating your company's profit for 20X3 you discover that

1.A non-current asset costing $50,000 has been included in the purchases account.

2.Stationary costing $10,000 has been included as closing inventory of raw materials, instead of inventory of office stationary.

The two errors have an effect of

A.Understating gross profit by $40,000 and understating net profit by $50,000.

B.understating both gross profit and net profit by $40,000.

C.understating gross profit by $60,000 and understating net profit by $50,000.

D.overstating both gross profit and net profit by $60,000.</i></b>

I made the following conclusions

Error 1 should understate Gross Profit by $50,000 as the Cost of Sales are overstated by $50,000. Thus Net Profit is also understated by $50,000.

Error 2 should overstate the gross profit by $10,000 as the cost of sales are understated by $10,000.Thus the Net profit is also overstated by $10,000.

Therefore, both Gross profit and net profit are understated by $40,000. So according to my calculations the answer should be <u>B</u>.

But the answers' section says the answer is A. My conclusion about error 1 is correct. But not about error 2.

It says error 2 will only affect the gross profit and have no affect on the net profit. How can that be?

Can someone explain?