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ACCA · Question 52 · Preparing basic financial statements
Section B - Case 2: Single Entity Accounts & Ratio Analysis
*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
- Depreciation on new turbines of $50,000 was omitted.
- An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
- Closing inventory was overvalued by $30,000.
- An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*
Calculate the adjusted Gross Profit for the year ended 31 December 20X8. (Assume depreciation is an administrative expense). (Enter numbers only)
Section B - Case 2: Single Entity Accounts & Ratio Analysis
*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
- Depreciation on new turbines of $50,000 was omitted.
- An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
- Closing inventory was overvalued by $30,000.
- An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*
Calculate the adjusted Gross Profit for the year ended 31 December 20X8. (Assume depreciation is an administrative expense). (Enter numbers only)
How to approach this question
Draft Gross Profit = Revenue - Cost of Sales. The only adjustment affecting Gross Profit is the closing inventory overvaluation (which increases Cost of Sales).
Full Answer
Draft Gross Profit = $4,000,000 - $2,200,000 = $1,800,000.
The overvaluation of closing inventory by $30,000 means Cost of Sales was understated by $30,000. Therefore, adjusted Cost of Sales = $2,230,000.
Adjusted Gross Profit = $4,000,000 - $2,230,000 = $1,770,000. (Alternatively: $1,800,000 - $30,000 = $1,770,000). The other adjustments affect operating expenses, not gross profit.
Common mistakes
Deducting depreciation or bad debts from Gross Profit.
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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