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A food retailer purchased a computer and debited the cost to the purchases account. What was the effect on the profit for the year and the non-current assets? Profit for the year Non-Current Assets Overstated Understated Overstated Understated А B С D OA OB OD

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Answer:

  • Profit for the year UNDERSTATED
  • Non-Current Assets UNDERSTATED

Explanation:

A food retailer buying a computer means that it is a Non-current asset. Non-current assets should not be described as Purchases.

In debiting the asset to Purchases, purchases will be overstated which means that Cost of Goods sold is overstated as well and this will reduce the profit more than it should as COGs are deducted from profit. Profits will therefore be understated.

As the computer was supposed to go to Non-Current assets but did not, the non-current assets will be understated because they are less than they ought to be.

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