Question 3.A.3: Look back to Example 3.1 and assume that a trainee accountan...
Look back to Example 3.1 and assume that a trainee accountant prepared the income statement. Subsequent checking by the chief financial officer revealed the following errors:
1 Staff performance bonuses amounting to £12,500 had been charged to cost of sales.
2 The depreciation charge for fixtures and fittings should be £10,000 not £1,000.
3 Stationery costing £500 had been treated as interest on borrowings.
What will be the gross profit, operating profit and profit for the period after the above errors have been corrected?
Your answer should be as follows:
| Note | £ | |
| Corrected gross profit (78,000 + 12,500) | 1 | \underline{90,500} |
| Corrected operating profit (24,600 – (10,000 – 1,000) – 500) |
2 | \underline{15,100} |
| Corrected profit for the period (15,100 + 2,000 – (1,100 – 500)) |
3 | \underline{16,500} |
Notes:
1 Staff bonuses should be treated as part of the salaries and wages of the business. This means that cost of sales will decrease by £12,500 and gross profit will increase by a corresponding amount. The corrected gross profit figure is, therefore, £90,500 (that is, £78,000 + £12,500). The operating profit and profit for the period, however, will not be affected by this correction. Although the salaries and wages operating expense will increase by £12,500, this is offset by a compensating increase in gross profit.
2 The increase in the depreciation charge from £1,000 to £10,000 will decrease operating profit by £9,000. Furthermore, by treating stationery correctly, operating expenses will increase by £500, thereby decreasing operating profit by a corresponding amount. The corrected operating profit figure is, therefore, £15,100 (that is, £24,600 – £9,500).
3 The corrected profit for the period is calculated by taking the corrected operating profit £15,100, adding the interest received from investments £2,000, and then deducting the correct amount of interest on borrowing £600 (that is, £1,100 – £500) = £16,500.