WAEC SSCE - Financial Accounting - 2019

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

The amount of dividend declared is N200,000. To calculate this, you first need to find out the total value of the company's ordinary share capital, which is 1,000,000 shares x N2.00 per share = N2,000,000. Next, you take 10% of this amount to find the dividend, which is 10% of N2,000,000 = N200,000. So the directors of Olu Ltd. declared a dividend of N200,000.

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

In accounting, partners' share of profit is transferred to the credit side of the partner's current account. The current account is a record of the transactions related to each partner's capital contributions, drawings, and share of profits or losses. So, when a profit is made, the partners' share of that profit is credited to their current account to show an increase in their capital balance. On the other hand, the fixed capital account is a record of the long-term investments made by the partners into the business, such as buildings, machinery, and equipment. The fixed capital account is not usually affected by the profits or losses of the business, but rather by any changes in the value of the long-term investments. So, in summary, the partners' share of profit is credited to their current account, while the fixed capital account is maintained separately.

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

The fixed installment method of depreciation assumes that the asset loses an equal amount of value each year over its useful life. To determine the depreciation per annum using this method, we subtract the salvage value (scrap value) from the original cost of the asset and then divide the result by the useful life in years. In this case, the original cost of the lathe machine is Le 45,600, and the salvage value is Le 1,600. The useful life of the machine is 20 years. Therefore, the annual depreciation is: Depreciation = (Original cost - Salvage value) / Useful life Depreciation = (45,600 - 1,600) / 20 Depreciation = 44,000 / 20 Depreciation = 2,200 Therefore, the depreciation per annum for the lathe machine is Le 2,200.

Akọwa Nkọwa

Akọwa Nkọwa

The quality of accounting information is that it should be "verifiable". This means that the information should be capable of being checked and confirmed by independent sources or methods. In other words, the accuracy and truthfulness of the accounting information should be able to be verified by others to ensure that it is reliable and trustworthy. Verifiability is important in ensuring that financial statements are free from bias or manipulation, which is crucial for making sound business decisions.

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

The total cash receipts for the period can be calculated by adding up all the cash received during the period. From the information given, the following cash transactions took place: Cash sales on April 11 = N50,000 Cash sales on April 28 = N49,000 Therefore, the total cash receipts for the period is: N50,000 + N49,000 = N99,000 So the correct option is (A) N99,000.

Akọwa Nkọwa

Akọwa Nkọwa

The primary concern of shareholders in a business is the dividend payable. Dividends are payments made by a company to its shareholders, typically from the company's profits. Shareholders invest in a business with the expectation of receiving a return on their investment, and one way they can receive this return is through dividends. Shareholders generally want to see the company perform well so that they can receive higher dividends. While other factors such as the ability to pay interest and welfare of employees may also be important to shareholders, the primary concern is typically the dividend payable.

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

The balance on the bank statement would be less than the cash book balance if bank charges are deducted from the customer's account. The cash book balance is the record of all the money that has come into and gone out of a customer's account as recorded by the customer. However, the bank statement is a record of all transactions in a customer's account as recorded by the bank. When the bank deducts charges such as service fees or overdraft fees, these charges are not recorded in the customer's cash book, but they are recorded in the bank's records and will appear on the bank statement. This means that the balance on the bank statement will be lower than the balance recorded in the customer's cash book.

Akọwa Nkọwa

When the letter "C" is written in front of an entry in the folio column of a cash book, it shows that it is a contra entry. A contra entry is a type of transaction in accounting that involves two accounts. In this type of entry, the debit and credit entries cancel each other out, resulting in a net effect of zero. In other words, if you were to add up the two entries, the total would be zero. This type of entry is used when money is transferred from one account to another, such as when you transfer money from your checking account to your savings account.

Akọwa Nkọwa

To determine the cash balance at the end of the period, we need to add up all the cash inflows and subtract all the cash outflows. Starting with the cash inflows: - Cash sales on April 11: N50,000 - Cash sales on April 28: N49,000 Total cash inflows: N99,000 Moving on to the cash outflows: - Bought goods for cash on April 20: N30,000 - Bought postage stamp for cash on April 26: N5,000 - Cash purchases on April 29: N11,000 - Paid salaries on April 30: N18,000 Total cash outflows: N64,000 To determine the cash balance, we subtract the total cash outflows from the total cash inflows: Cash balance = Total cash inflows - Total cash outflows Cash balance = N99,000 - N64,000 Cash balance = N35,000 Therefore, the cash balance at the end of the period is N35,000.

Akọwa Nkọwa

Companies issue shares to the public in order to raise capital. When a company issues shares, it is essentially selling ownership in the company to investors in exchange for funds. These funds can then be used to invest in new projects, expand the business, pay off debts, or for any other purpose that the company deems necessary. In return, shareholders receive a portion of the company's profits, as well as voting rights and other benefits depending on the type of shares they own.

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

A general partner is a type of business partner whose liability goes beyond their capital. This means that if the business is sued or incurs debt, the general partner is personally responsible for paying those debts, even if they go beyond the amount of money they have invested in the business. In simple terms, a general partner is fully responsible for the financial obligations of the business, unlike a limited partner whose liability is limited to the amount of money they have invested. So, if you are a general partner in a business, you are responsible for all of the debts and obligations of the business, even if they are more than the amount of money you have invested.

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

In public sector accounting, salaries of employees are classified as recurrent expenditure. Recurrent expenditure refers to regular and routine expenses incurred by an organization in carrying out its day-to-day activities. These expenses are incurred repeatedly and are necessary for the normal functioning of the organization. Salaries of employees are a type of recurrent expenditure as they are paid regularly, such as monthly or bi-weekly, to compensate employees for their services. This is in contrast to capital expenditure, which refers to the costs incurred for acquiring and improving assets such as land, buildings, and equipment. Therefore, since salaries are a routine and regular expense necessary for the day-to-day operations of an organization, they are classified as recurrent expenditure in public sector accounting.

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

This would be treated as "drawings". Drawings refer to the goods or cash that the owner of a business takes out of the business for personal use. In this case, Sulah took two textile materials worth N500 from his business for his children's use. Since this was not a sale or a loan, but rather an extraction of goods for personal use, it would be considered as "drawings" from the business. It is important for business owners to keep track of their drawings as it affects the profitability and financial position of their business.

Akọwa Nkọwa

The concept that seeks to prevent profits from being overstated is "prudence." Prudence is a principle of accounting that requires caution and conservatism when making estimates or judgments about financial transactions. It encourages accountants to be careful not to overstate the value of assets or profits, and to recognize potential losses or liabilities in a timely manner. By applying the principle of prudence, accountants ensure that financial statements accurately reflect the financial position and performance of a business. This helps to maintain the credibility and integrity of financial reporting, and enables stakeholders to make informed decisions based on reliable information.

Akọwa Nkọwa

Akọwa Nkọwa

Akọwa Nkọwa

The closing capital can be calculated using the following formula: Closing Capital = Opening Capital + Net Profit - Drawings Plugging in the values from the information given, we get: Closing Capital = 10,800 + 6,000 - 2,500 Closing Capital = 14,300 Therefore, the closing capital is 14,300. This represents the total amount of capital that the business has at the end of the accounting period after taking into account the net profit earned during the period and the amount withdrawn by the owner. The closing capital is an important figure that helps the business owner to understand the financial health of the business and make decisions about its future operations.

Akọwa Nkọwa

The quick ratio is a measure of a company's ability to pay off its short-term debts with its most liquid assets. It is calculated by subtracting the value of a company's stock (raw materials, work in progress, finished goods) from its current assets, and then dividing the result by the company's current liabilities. So, the correct option is (3): x = current assets; y = stock and z = current liabilities. This is because the quick ratio formula subtracts the stock (inventory) value from the current assets to arrive at the most liquid assets available for paying off short-term obligations. And, the current liabilities reflect the company's immediate debts that must be paid off in the short term.

Akọwa Nkọwa

First, we need to calculate the interest on capital for both partners. Interest on Ogah's capital = 5% of 60,000 = 3,000 Interest on Ajem's capital = 5% of 65,000 = 3,250 Next, we need to calculate the interest on their drawings. Interest on Ogah's drawings = 3% of 20,000 = 600 Interest on Ajem's drawings = 3% of 30,000 = 900 Now, we can calculate the total amount of interest for each partner by adding the interest on their capital and the interest on their drawings. Total interest for Ogah = 3,000 + 600 = 3,600 Total interest for Ajem = 3,250 + 900 = 4,150 We can now calculate the adjusted capital for each partner by adding their capital account, current account balance, and subtracting their drawings and the interest on their drawings. Adjusted capital for Ogah = 60,000 + 40,000 - 20,000 - 600 = 79,400 Adjusted capital for Ajem = 65,000 + 50,000 - 30,000 - 900 = 84,100 The total adjusted capital for the partnership is the sum of the adjusted capital for both partners. Total adjusted capital = 79,400 + 84,100 = 163,500 Now, we can calculate each partner's share of the profit. Ogah's share of the profit = (2 / 5) x (100,000 - 10,000 - 3,600) = 51,150 Ajem's share of the profit = (3 / 5) x (100,000 - 10,000 - 4,150) = 48,850 Therefore, the answer is option A - 51,150.

Akọwa Nkọwa

(a) Three effects of drawings on the business of a sole proprietor are:

1. Reduced business equity: Drawings are withdrawals made by the owner from the business profits, which decreases the owner's equity in the business.
2. Affects financial statements: Drawings affect the profit and loss statement by reducing the net income and the balance sheet by reducing the owner's equity.
3. Tax implications: Drawings by the owner are not tax-deductible expenses, and the owner may have to pay personal income tax on the drawings taken from the business.

(b) The treatment of the following items in the balance sheet are:

1. Accrued expenses: These are expenses that the business has incurred but not yet paid for. They are shown as liabilities in the balance sheet and are recorded as an expense in the profit and loss statement. For example, if a business has received goods or services but not yet paid for them, they will be recorded as accrued expenses.
2. Prepaid expenses: These are expenses that the business has paid for in advance but have not yet been used up. They are shown as assets in the balance sheet and are recorded as expenses in the profit and loss statement as they are used up over time. For example, if a business has paid rent in advance for the next six months, it will be recorded as prepaid expenses.
3. Accrued income: This is income that the business has earned but has not yet received payment for. It is shown as an asset in the balance sheet and is recorded as revenue in the profit and loss statement. For example, if a business has provided services but not yet received payment, it will be recorded as accrued income.

Akọwa Nkọwa

(a) Three reasons for which a cheque would be dishonored are:

1. Insufficient funds: If the account of the person who wrote the cheque does not have enough funds to cover the amount of the cheque, it will be dishonored.
2. Irregular signature: If the signature on the cheque does not match the signature the bank has on record for the account holder, it will be dishonored.
3. Stale cheque: If the cheque is presented to the bank after a certain period of time (usually 6 months), it will be dishonored.

(b)

i. Petty cash float: Petty cash float refers to a small amount of cash that is kept on hand by a business to cover small expenses, such as office supplies or minor repairs. This cash is usually held by a designated employee who is responsible for making small purchases on behalf of the business.

ii. Contra entries: Contra entries refer to entries made in a business's accounting system that offset each other. For example, if a business owes money to another business, and that other business also owes money to the first business, the two amounts can be offset against each other, resulting in a contra entry.

iii. Imprest system: The imprest system is a method of managing petty cash that involves maintaining a fixed amount of cash on hand, and then replenishing that amount as needed. Under this system, a designated employee is given a fixed amount of petty cash at the start of each period (usually a week or a month). This employee then makes small purchases on behalf of the business using this cash, and at the end of the period, any remaining cash is counted and reconciled, and the employee is reimbursed for any expenses made.

(c) Three advantages of keeping a petty cash book using the imprest system are:

1. Control: The imprest system provides a high degree of control over petty cash expenditures. By maintaining a fixed amount of cash on hand and carefully tracking all petty cash transactions, businesses can ensure that petty cash is being used for legitimate business expenses and that there is no misuse or theft of funds.
2. Efficiency: The imprest system is a very efficient way to manage petty cash. By maintaining a fixed amount of cash on hand and reimbursing employees for expenses on a regular basis, businesses can avoid the need for frequent trips to the bank and can save time and effort.
3. Accuracy: The imprest system promotes accuracy in accounting. By carefully tracking all petty cash transactions and reconciling the petty cash account on a regular basis, businesses can ensure that their accounting records are accurate and up-to-date, which can help prevent errors and discrepancies in financial reporting.

Akọwa Nkọwa

a) Profit and Loss Appropriation Account

The Profit and Loss Appropriation Account is a summary of the profits earned by the business and how they are to be divided among the partners. To prepare the Profit and Loss Appropriation Account for the year ended 31st December 2015, we need to consider the following:

1. Interest on capital: Interest of 8% should be calculated on the total capital of D 300,000 + D 250,000 = D 550,000. The interest calculation would be D 550,000 x 8/100 = D 44,000.
2. Salary: Hassanah would be paid a salary of D 10,000 per month, so for the year, the total salary would be 12 x D 10,000 = D 120,000.
3. Interest on drawings: Interest on drawings of D 20,000 and D 15,000 should be calculated at 5%. The interest calculation would be (D 20,000 + D 15,000) x 5/100 = D 1,500.
4. Profit: The profit made for the year was D 300,000.

The Profit and Loss Appropriation Account would show the following:

Debit: Interest on Capital D 44,000

Debit: Salary D 120,000

Debit: Interest on Drawings D 1,500

Debit: Total D 165,500

Credit: Profit D 300,000

Credit: Total D 300,000

b) Partners' Current Accounts

The Partners' Current Accounts are individual accounts for each partner that show their capital balance, drawings, interest on capital and drawings, and their share of profit/loss. To prepare the Partners' Current Accounts, we need to consider the following:

1. Ubochi's Current Account: Ubochi contributed D 300,000 as capital, made drawings of D 20,000, received interest on capital of D 44,000 x 3/5 = D 26,400 and interest on drawings of D 1,500 x 3/5 = D 900. His share of profit would be D 300,000 x 3/5 = D 180,000.
2. Hassanah's Current Account: Hassanah contributed D 250,000 as capital, made drawings of D 15,000, received interest on capital of D 44,000 x 2/5 = D 17,600 and interest on drawings of D 1,500 x 2/5 = D 600. Her share of profit would be D 300,000 x 2/5 = D 120,000.

The Partners' Current Accounts would show the following:

Ubochi's Current Account:

Debit: Capital D 300,000

Debit: Drawings D 20,000

Debit: Interest on Capital D 26,400

Debit: Interest on Drawings D

Akọwa Nkọwa

The adjusted cash book is a corrected version of the original cash book that takes into account any discrepancies or errors that were discovered between the cash book and the bank statement. To prepare the adjusted cash book, we need to consider the following:

1. Standing order not entered in the cash book: A standing order of N160 should be added as a debit in the cash book.
2. Bank charges not in the cash book: Bank charges of N40 should be added as a debit in the cash book.
3. Cash paid into the bank entered incorrectly: The cash paid into the bank for N400 should be corrected to N400 in the cash book.
4. Dishonoured cheque: A cheque of N200 received from a customer was dishonoured, so it should be removed from the cash book as a credit.
5. Credit transfer: A credit transfer of N400 from a customer should be added as a credit in the cash book.
6. Cheque entered incorrectly: The cheque of N1,360 paid to Dexter Ltd should be corrected to N1,360 in the cash book.
7. Receipt not entered in the cash book: A receipt of N40 shown on the bank statement should be added as a credit in the cash book.
8. Cheque still with the supplier: A cheque of N160 paid to a supplier that is still with the supplier should not be included in the cash book yet.
9. Receipts not on the bank statement: Receipts of N3,600 paid into the bank on 30th September 2017 should be added as a credit in the cash book, but only after they appear on the bank statement.
10. Cheque wrongly credited by the bank: A cheque of N1,080 that was wrongly credited by the bank as GH¢600 should be corrected to N1,080 in the cash book.
11. Transfer not recorded in the cash book: A transfer of N6,000 to the bank should be added as a credit in the cash book.

By making these adjustments, we can arrive at the adjusted cash book, which accurately reflects the true balance of Adedeji's account.

Akọwa Nkọwa

(a) Sources of revenue to a federal government may include:

• Taxes, such as income tax, sales tax, property tax, and corporate tax.
• Revenue from licenses and permits.
• Fines and penalties.
• User fees.
• Grants and subsidies.
• Borrowing.

(b) The advantages of cash basis in public sector accounting include:

• Simplicity: It only records transactions when cash is received or paid out, making it easier for small organizations to maintain their records.
• Clear cash flow picture: It provides a clear picture of the organization's cash flow, making it easier to manage and plan for future expenses.

(c) Five reasons for public sector accounting are:

1. Accountability: Public sector accounting helps to ensure that government organizations are accountable to the public for their use of resources and financial management. It provides transparency and helps to prevent fraud and corruption.
2. Planning and Budgeting: Public sector accounting provides important information for planning and budgeting processes. It allows governments to track and analyze their spending and revenue and make informed decisions about resource allocation.
3. Financial Control: Public sector accounting provides a framework for financial control and management, ensuring that government organizations operate within their budgets and comply with financial regulations.
4. Reporting: Public sector accounting requires regular reporting of financial information to stakeholders, including the public, government officials, and other interested parties. This helps to maintain transparency and build trust.
5. Decision Making: Public sector accounting provides information for decision making by government officials, helping them to make informed choices about policy, programs, and resource allocation. It also provides data for the evaluation of government programs and initiatives.

Akọwa Nkọwa

(a) Closing entries are journal entries made at the end of an accounting period to transfer the balances of temporary accounts such as revenue, expenses, and dividends to a permanent account such as retained earnings. The purpose of closing entries is to reset the temporary accounts to zero to prepare them for the next accounting period.

(b) A branch is a separate business location that operates under the same legal entity as the parent company. A department, on the other hand, is a subunit of the parent company that operates within the same location as the parent company.

(c) The four reasons for the preparation of branch accounts are:

1. To ascertain the profitability of each branch: Branch accounts help to determine the profitability of each branch by recording the revenues, expenses, and profits of each branch separately. This information is useful for decision-making and evaluating the performance of each branch.
2. To evaluate the performance of branch managers: Branch accounts provide information on the performance of branch managers, which helps the parent company to evaluate the effectiveness of the management in each branch. This information can be used to make decisions on promotions, bonuses, or training programs.
3. To monitor inventory levels: Branch accounts help to monitor inventory levels at each branch, which is important for determining the stock level requirements and avoiding overstocking or understocking.
4. To comply with legal and taxation requirements: Branch accounts are required by law to be prepared and submitted to the relevant authorities. This ensures compliance with legal and taxation requirements and helps to avoid penalties or fines.

Akọwa Nkọwa

(a) A ledger is a record-keeping book or database that contains financial transactions of a business. It is used to track and monitor the financial activities of a company, including sales, purchases, expenses, and payments.

(b) An invoice serves as a critical document that outlines the transaction details between the buyer and the seller. Some uses of an invoice to the seller include:

• Providing a record of the transaction for future reference.
• Facilitating the tracking of payments and outstanding balances.
• Serving as proof of the sale in case of disputes or legal issues.

Some uses of an invoice to the buyer include:

• Providing a detailed breakdown of the goods or services purchased.
• Serving as a record of the transaction for accounting and tax purposes.
• Facilitating the tracking of payments and outstanding balances.

(c) Dividing the ledger into different classes has several advantages, including:

• Organizing financial information: By classifying financial transactions into different categories, it becomes easier to organize and analyze the financial information. This helps to identify trends, patterns, and potential areas for improvement.
• Facilitating decision-making: Dividing the ledger into different classes provides a better understanding of the company's financial performance. It helps in making informed decisions about budgeting, investment, and other financial matters.
• Simplifying accounting processes: A well-organized ledger makes it easier to prepare financial statements, tax returns, and other accounting reports. This can save time and resources and reduce the risk of errors.

Overall, dividing the ledger into different classes can help businesses manage their finances more effectively and efficiently.

Akọwa Nkọwa

Ratio analysis is a useful tool to evaluate a company's financial performance and health. However, it is not without limitations. Here are some of the key limitations of ratio analysis:

1. Limited scope: Ratio analysis is a quantitative tool and can only reveal limited information about a company's financial performance. It does not provide any insights into qualitative factors such as the company's management style, reputation, or brand strength.
2. Historical data: Ratio analysis relies on historical data, which may not always be an accurate predictor of future performance. Market trends, industry shifts, and economic changes can have a significant impact on a company's financial performance and cannot be fully captured by ratio analysis.
3. Industry-specific: Ratios may not be comparable across industries. Different industries have different operating models and therefore, different financial ratios. For example, the inventory turnover ratio may be higher in the retail industry than in the manufacturing industry.
4. Accounting practices: Ratio analysis relies on financial statements, which are prepared according to accounting standards. Different accounting practices can impact the ratios and make it difficult to compare the financial performance of companies.
5. Limited benchmarking: Ratios are often used to benchmark a company's performance against its peers or competitors. However, finding comparable companies can be challenging, especially for smaller or niche companies.

In summary, ratio analysis is a valuable tool for evaluating a company's financial performance, but it has limitations. Investors and analysts should consider these limitations and use other methods of analysis to gain a more comprehensive understanding of a company's financial health.

Akọwa Nkọwa

(a) Sales Journal:

(b) Customers' Accounts in the Sales Ledger:

Papuk

Abass

(c) Sales Ledger Control Account:

Akọwa Nkọwa

(a) Outstanding liabilities are included in the balance sheet because they represent debts that a company owes to others and are expected to be paid in the future. Including these debts in the balance sheet provides an overall picture of the company's financial position, including its assets and obligations. Outstanding liabilities also serve as a basis for calculating a company's net worth, which is the difference between its total assets and total liabilities.

(b) To record an income generating activity of a bar in a not-for-profit-making organization, you would first record the revenue generated from the sale of drinks and food. This would be recorded in the revenue account. Then, you would subtract the expenses incurred from operating the bar, such as the cost of goods sold, salaries, rent, utilities, and other operating expenses. These expenses would be recorded in the appropriate expense accounts. The net income from the bar operation would then be recorded as part of the organization's overall net income, which would be reflected in the statement of activities or the income statement. It is important to note that in a not-for-profit organization, the purpose of generating income from activities like the bar is not to make a profit, but rather to support the organization's mission and programs.

Akọwa Nkọwa

(a) Increase in provision for doubtful debts: A provision for doubtful debts is an estimate of the amount of money that a company may not receive from its customers. If a company expects that the number of unpaid debts may increase, it will increase the provision for doubtful debts. This will result in a decrease in the profit of the company, as the increase in the provision will be considered as an expense in the income statement. In the final accounts, the increase in provision for doubtful debts will be shown as a deduction from the debtors in the balance sheet.

(b) Decrease in provision for doubtful debts: If the company's customers pay off their debts and the company no longer expects any bad debts, it may decrease the provision for doubtful debts. This will result in an increase in the profit of the company, as the decrease in the provision will be considered as an income in the income statement. In the final accounts, the decrease in provision for doubtful debts will be shown as an addition to the debtors in the balance sheet.

(c) Provision for discount on debtors: A provision for discount on debtors is an estimate of the amount of money that a company may have to give as a discount to its customers for paying their debts early. This provision is created to reflect the expected loss of income due to the discount. In the final accounts, the provision for discount on debtors will be shown as a deduction from the debtors in the balance sheet.

(d) Provision for discount on creditors: A provision for discount on creditors is an estimate of the amount of money that a company may have to pay as a discount to its suppliers for paying their debts early. This provision is created to reflect the expected loss of income due to the discount. In the final accounts, the provision for discount on creditors will be shown as an addition to the creditors in the balance sheet.

(e) Provision for depreciation: Depreciation is the decrease in the value of an asset over time due to wear and tear, obsolescence, or other factors. A provision for depreciation is created to reflect the decrease in the value of fixed assets, such as buildings, machinery, and vehicles. In the final accounts, the provision for depreciation will be shown as a deduction from the fixed assets in the balance sheet. The provision for depreciation is also shown as an expense in the income statement, which reduces the profit of the company.