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rafapak


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exercise on purchases
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hi guys

I would like to ask you for help. In one of the tests I found this question. Can you 

tell me what correct answer should be and why?

 

If an item of new machinery purchased was incorrectly analysed as a repair cost, what 

is the effect on profits?

A)Profits would be understated.

B)Profits would be overstated.

 



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VinceH


Expert

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Give it a moment's thought:

* It should have been debited to fixed assets, which means the cost of the purchase wouldn't have affected the profit and loss account in any way.

* Instead, it was debited to repairs on the profit and loss account, and therefore has increased the amount showing on the expenses side of the account.

Ignoring the way the profit and loss is presented, the profit is the value of sales minus the value of all the expenses - and here we have something in the profit and loss account that shouldn't be.

If the profit has gone up as a result of this mistake, it has been overstated.

If the profit has gone down as a result of this mistake, it has been understated.

So which has happened? Has the mistake resulted in the profit going up or down?


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Vince M Hudd - Soft Rock Software

(I only came here looking for fellow apiarists...)
rafapak


Senior Member

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Posts: 396
Date:
Permalink Closed

thanks Vince

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