# Confused By Error Correction

Hi all,

I'm prepping form my Financial accounting exam and I have come across a particular question and no matter how I work it out, I do not get to what it says the correct answer is in the book..Here goes!

After calculating your company's profit for 2003, you discover that

a) A non-current asset costing £50,000 has been included in the purchases account

b) Stationery costing £10,000 has been inclued as closing inventory of raw materials, instead of inventtory of stationery.  The two errors have the 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 net profit by £50,000
D) Overstating both gross profit and net profit by £60,000.

The correct answer in the book is A, which at a glance might seem obvious, but here is my problem.  Both items are included in cost of sales, so you take the £50k out of purchases and the £10k out of closing inventory, this will reduce your costs by £40k and therefore increase your Gross profit by £40k.  Fine.

But when you apply the £10k charge to the income statement for stationery and then lift it to inventory the net proifit difference comes out at £40k not £50k, below I give two quick P&L examples

Inc Errors             Corrections

Sales                          750,000               750,000

Opening Inventory          40,000                 40,000
Purchases                  450,000                400,000 (non-current asset taken out)
Closing inventory         (30,000)                  (20,000) (stationery taken out)

Cost of Sales             460,000                  420,000
Gross Profit               260,000                 300,000

Wages                      100,000               100,000
Depreciation                15,000               15,000
Stationery                                            10,000

Credit Sationery A/C to invntory           (10,000)

Net Profit                   120,000             160,000 - £40,000 DIFFERENCE NOT £50

Is it me or am I missing the point!!!! Help!!!!!

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