Question

Example 1 Alison's draft financial statements show a net profit for the year of $52,380. Subsequently, the following errors come to light (a) No entry has been made for $563 cash received from Adele, a customer whose debt was written off last year as irrecoverable Closing inventory valued in the draft accounts at its cost of $8,920, was believed to have a potential sales value of $7,930 Goods which had cost $2,000 had been sent to a customer just before the year end on a sale or return basis. These had been accounted for as a firm sale, with a profit of 20% of cost. No confirmation of the sale had been received from the customer. (b) (c) A payment for rent charged in full to the current year included $490 which relates to the next accounting period. No adjustment had been made for this when preparing the draft accounts (d) Prepare a statement of adjustments to profit in order to calculate the correct net profit for the year.

Answer 1

Particulars	Amount ($)
Net profit as per draft financials	52380
+ cash received from adele	563
- decrease in value of inventory (8920-7930)	990
- unconsummated sale on sale or return basis (2000*20%)	400
+ rent relating to next year	490
Correct net profit	52053

Note: the transaction of sale on sale or return basis has been assumed to be unconsummated because the good were only sent just before the end of the relevant financial year. The customer must be given a reasonable amount of time to make a decision. And since the last day to approve or reject the product has not been given in the question, the sale is assumed be unconsummated.