Today's Topic - Factors which Increase (or Decrease) Gross Profit (G/P)
Revision Series for IPCC audit
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Today’s Topic –
Factors which Increase (or Decrease) Gross Profit (G/P)
(Q can either be asked only for factors which increase the Gross Profit or only for factors which decrease the Gross Profit or it can be asked for both)
If the Q is for 2 marks, (for 2 marks it can be either for increase or for decrease, therefore mention 4-5 points in either case)-
Factors which increase G/P
§ Undervaluation of opening stock
§ Overvaluation or Alteration in basis of valuation of closing stock
§ Wrong adjustments made in sales or Fictitious purchases
§ Closing stock includes goods sold but not dispatched
§ No or under provision of expenses
Factors which decrease G/P
§ Overvaluation of opening stock
§ Undervaluation or Alteration in basis of valuation of closing stock
§ Purchases of previous year, but goods included in current year
§ Excess provision for expenses
§ Exclusion of goods sent for sale on approval or consignment
(usually for 1 mark, give two points, if Q for 2 marks asks for both increase & decrease, than mention 2 points for each..)
If the Q is for 4 marks, explain the following points in either case –
Factors which increase G/P
§ Undervaluation of opening stock
§ Overvaluation of closing stock
§ Alteration in basis of valuation of closing stock, resulting in increase in value of closing stock.
§ Increase in value of items to be included in opening stock above cost, as a result of which the unsold stock at the end of the year is valued at cost.
§ Wrong adjustments made in sales .
§ Inclusion of Fictitious sales in order to boost up the profit
§ Closing stock includes goods sold but not dispatched
§ Treating consignment sale as regular sale will increase the sales
§ No or under provision of expenses which will result in increase in gross profit
§ Wrong allocation of expenses like expenses which are to be taken in Trading Account have been taken into Profit & Loss Account.
Factors which decrease G/P
§ Overvaluation of opening stock
§ Undervaluation of closing stock
§ Alteration in basis of valuation of closing stock, resulting in decrease in value of closing stock.
§ Purchases of previous year, but goods included in current year, will increase the purchases & will result into decrease in G/P
§ Reversal of fictitious sales entries of previous years
§ Excess provision made for expenses
§ Exclusion of goods sent for sale on approval or consignment
§ No adjustment made to unused stock, will decrease the closing stock, resulting in decrease in G/P
§ Failure to take insurance credit for good lost in transit
(While answering this Q, keep in mind the Trading and Profit & Loss Account and then think of the effect of each item. As the Q asks specifically for mentioning the factors, just mentioning all the points is sufficient for 4 marks as examiner is looking for whether you know the exact points and not for detailed explanation for just 4 mrks.)
If the Q is for 8 marks, mention the above points in detail–
Factors which increase G/P
§ Undervaluation of opening stock, it can either be due to –
· Non-inclusion of certain item of stock, or
· Making a lower valuation of stock or valuation at lower rate, or
· Miscalculation or understatement of one or more stock items.
§ Overvaluation of closing stock, it can either be due to –
· Inclusion of certain item of stock, or
· Making a higher valuation of stock or valuation at a higher rate, or
· Miscalculation or over statement of one or more stock items.
§ Alteration in basis of valuation of closing stock, e.g. using different methods of valuation for opening stock (valued at cost or market price whichever is lower) & closing stock (valued at cost or market price whichever is higher)
§ Increase in value of items to be included in opening stock above cost, as a result of which the unsold stock at the end of the year is valued at cost.
§ Wrong adjustments made in sales
§ Inclusion of Fictitious sales in order to boost up the profit
§ Closing stock includes goods sold but not dispatched or when goods sold & physically taken out of the stock last year but their invoices are raised in the current year will increase the sale of the current year thus increasing the gross profit.
§ Treating consignment sale as regular sale will increase the sales, thus increasing the G/P
§ No or under provision of expenses which will result in increase in gross profit
§ Wrong allocation of expenses like expenses which are to be taken in Trading Account have been taken into Profit & Loss Account.
Factors which decrease G/P
§ Overvaluation of opening stock, it can either be due to –
· Inclusion of certain item of stock, or
· Making a higher valuation of stock or valuation at a higher rate, or
· Miscalculation or over statement of one or more stock items.
§ Undervaluation of closing stock, it can either be due to –
· Non-inclusion of certain item of stock, or
· Making a lower valuation of stock or valuation at a lower rate, or
· Miscalculation or understatement of one or more stock items.
§ Alteration in basis of valuation of closing stock, resulting in decrease in value of closing stock, ..g. using different methods of valuation for opening stock (valued at cost or market price whichever is higher) & closing stock (valued at cost or market price whichever is lower)
§ Purchases of previous year, but goods included in current year, will increase the purchases & will result into decrease in G/P
§ Reversal of fictitious sales entries of previous years, which has increased the sales of previous year, but due to reversal in current year it has decreased the sale & thus resulting into decrease in G/P
§ Excess provision made for expenses which will result in decrease in gross profit
§ Exclusion of goods sent for sale on approval or consignment from the closing stock will decrease the gross profit
§ No adjustment made to unused stock, will decrease the closing stock, resulting in decrease in G/P
§ Failure to take insurance credit for good lost in transit will also decrease the gross profit, as loss will be increased but the claim to be received for the same will not be adjusted in the books of accounts.
Best Wishes,
‘Revision Series for IPCC’ Team