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ACCA Applied Knowledge · Financial Accounting · Statement of profit or loss and other comprehensive income

Lumen Co sold goods to a customer at a cost of $9,000 and invoiced $12,000. The goods were then returned in full and a credit note issued, but the return was not recorded at all. Inventory had been correctly reduced on the sale. What is the effect of correcting this on profit for the year?

Profit decreases by $3,000. Recording the return reduces revenue by $12,000 but also reduces cost of sales by $9,000 as the goods return to inventory at cost. The net effect is the lost gross profit of $3,000.

  1. AProfit decreases by $3,000Correct
  2. BProfit decreases by $12,000
  3. CProfit increases by $3,000
  4. DProfit decreases by $9,000

Explanation

Correction: reduce revenue by $12,000 (Dr sales, Cr receivables) and reinstate inventory at cost $9,000 (Dr inventory, Cr cost of sales). Net effect on profit = -12,000 + 9,000 = -3,000. Option $12,000 ignores the reversal of cost of sales.

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