Accounting Online Program Certification Practice Test

What was the effect of correcting the early settlement discount on Hood plc's accounts?

1. Increased net profit

2. Decreased net profit

3. No effect on net profit

4. Increased total assets

The correct answer is: Decreased net profit

When an early settlement discount is corrected, it typically results in adjustments that reduce the total revenue recognized by the company. This correction means that the amount recorded as sales revenue will decrease, thus directly impacting the net profit. In this scenario, reducing the sales revenue due to the adjustment of the early settlement discount leads to a lower gross profit, as expenses remain unchanged. Since net profit is calculated as total revenue minus total expenses, a decrease in revenue caused by correcting the discount effectively lowers the net profit. Moreover, while total assets might seem to be affected due to the reduction in accounts receivable, the primary focus here is on the direct relationship between the discount correction and net profit. Therefore, the most accurate conclusion about the effect of correcting the early settlement discount is a decrease in net profit.