Mark-up and Margin(Incomplete Records)

[Dandy Egharevba]

The draft account of Ini Edo for the year ended 31 December 2008 includes the following:

Revenue $80,000
Gross profit $20,000

It was however discovered that the revenue had been understated by $10,000and that closing inventory overstated by $5,000. After correcting these errors what is the gross profit percentage?

[Suze]

rev = 80k
gross profit = 20k
then cos of sale = 60k

therefore

revenue would be - 80k + 10k (understated) = 90k
COS would be - 60k - 5k (inventory overstatement) = 55k
therefore Gross Profit would be = 35k

gross profit margin = 35k/90k = 39%

[Dandy Egharevba]

Hello Suze,
Thanks alot for your quick response.That was lovely.I now have the idea as to how to go about questions of this nature.
dandy.

[Dagabie]

$'000
Revenue 80
Less Gross profit 20
Cost of Sales 60

Gross profit % = $20/$80 x 100% = 25%


After correction of errors:
$'000
Revenue 80
Add understatement 10
Total adjtd. revenue 90

Less Cost of Sales 60
Add inventory
overstated 5
Adjtd cost of sales 65
Adjusted Gross Profit 25

Gross profit % $25/$90 x 100 = 27.78%

NB. The understatement of closing inventory has the effect of increasing the cost of sales and reducing gross profit so the correction is to add the understatement of closing inventory to gross profit after the correction.

Example(1): $'000 $'000 (2) Closing inventory understated
by $5,000

Revenue 90 90
opening inventory 35 35
Add Purchases 55 55
Goods available for sale 90 Goods for sale 90
Less closing inventory 25 Less Closing inentory 20
Cost of sales 65 Cost of sales 70

Gross Profit (90- 65) 25 Gross profit 20

[Dagabie]

Negative goodwill as define by investment dictionery is the excess of the fair value of net assets acquired over the price paid for the assets.
The seller receives less than the actual value of his assets.

IFRS3 (BC143)
In some business combinations, the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the combination. That execss is commonly referred to as negative goodwill.
ED3 proposed, and the IFRS requires, that if an excess exists, the acquirer should:

(a) first reassess the identification and measurement of the acquiree's identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and

(b) recognise immediately in the profit or loss any excess remaining after that reassessment.

SUMMARY
First reassess the values of the identifiable assets and liabilities taken over to reaffirm that all identifiable assets and liabilities have been properly identified and recognised.

write off if any goodwill taken over.

write down the value of assets not properly assessed.

recognised all identifiable liabilities and contigent liabilities.

any excess should rarely remain if the valuations inherent in the accounting are properly performed.

(b) recognise immediately any excess remaining in profit or loss account.

the remaining excess sent to profit or loss account could be due to:
- errors that remain
- a distressed sale where the seller receives less than actual price.
- a bargain purchase where the seller wishes to exit from that business for other than
economic reasons and is prepared to accept less than its fair value as consideration.
- a requirement in an accounting standard to measure identifiable net assets acquired
at amount that is not fair value, but is treated as though it is fair value for the
purpose of allocating the cost of business combination (IFRS3 BC148)

[Suze]

$'000
Revenue 80
Less Gross profit 20
Cost of Sales 60

Gross profit % = $20/$80 x 100% = 25%


After correction of errors:
$'000
Revenue 80
Add understatement 10
Total adjtd. revenue 90

Less Cost of Sales 60
Add inventory
overstated 5
Adjtd cost of sales 65
Adjusted Gross Profit 25

Gross profit % $25/$90 x 100 = 27.78%

NB. The understatement of closing inventory has the effect of increasing the cost of sales and reducing gross profit so the correction is to add the understatement of closing inventory to gross profit after the correction.

Example(1): $'000 $'000 (2) Closing inventory understated
by $5,000

Revenue 90 90
opening inventory 35 35
Add Purchases 55 55
Goods available for sale 90 Goods for sale 90
Less closing inventory 25 Less Closing inentory 20
Cost of sales 65 Cost of sales 70

Gross Profit (90- 65) 25 Gross profit 20

Inventory was overstated

[platini]

rev = 80k
gross profit = 20k
then cos of sale = 60k

therefore

revenue would be - 80k + 10k (understated) = 90k
COS would be - 60k - 5k (inventory overstatement) = 55k
therefore Gross Profit would be = 35k

gross profit margin = 35k/90k = 39%

B/4 discovery of error:

Rev = 80 000
GP = 20 000

Afer discovery of error:

Rev = 80 000 + 10 000 = 90 000
GP = 20 000 + 10 000 - 5 000 = 25 000

GP% = 25 000/90 000 x 100
= 27.78%

N.B.
1 - Due to the fact that revenue was understated, it automatically implies that profit was equally understated. The $10 000 will therefore increase both revenue and profit.
2 - Understating closing inventory will increase profit or reduce COS (cost of sales). The $5 000 is therefore added to the GP to correct the error.

Platini

[Suze]

rev = 80k
gross profit = 20k
then cos of sale = 60k

therefore

revenue would be - 80k + 10k (understated) = 90k
COS would be - 60k - 5k (inventory overstatement) = 55k
therefore Gross Profit would be = 35k

gross profit margin = 35k/90k = 39%

I am sorry but what I should have done here was add the overstatement of closing inventory (CI) (reason is when calculating COS CI is less (subtracted) therefore minus and minus becomes a positive) therefore GP = 90-65 - 25

so GPM = 28%

[iftikharacca]

my answer is same like SUZE