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  1. avatar says

    Hi John,

    Can you please explain question 5 for me.

    I inventory 380000, add purchases 480000, minus destroyed inventory 220000 = 640000
    Margin % on sale 30% = 650000 / 1.3 = 500000 – 640000 = 140000 Answer B, but he answer is A.

    I thinking i’m working out the / 1.3 wrong. Can you also explain how to work the algebraic formula for working this margin out.

    Thanks

    AJ

    • Profile photo of John Moffat says

      If there is a margin of 30%, it means that the profit is 30% of selling price.

      So…..here, the profit is 30% x 650,000 = 195,000
      The cost of sales is 70% x 650,000 = 455,000

      The cost of sales = 380,000 + 480,000 – closing inventory.
      So the closing inventory should be 405,000.
      However the actual closing inventory is 220,000 and so the remainder must have been destroyed in the fire: 405000 – 220000 = 185,000.

      Hope that is clear :-)

      • avatar says

        Thank you. Was getting confused in working the percentage out but very clearly explained. The 30% is profit so 70% is COS, will hopefully make is easier working the other answer out.

  2. Profile photo of John Moffat says

    C is correct.

    If sales were 281250, then cost of sales is 1/1.5 x 281250 = 187500.

    Goods available for sale were 432800, so closing inventory should have been 432800 – 187500 = 245300.
    Actual closing inventory was 204600, so lost inventory = 245300 – 204600 = 40700.

  3. avatar says

    Question: A sole trader fixes her prices by adding 50% to the cost of all goods purchased. On 31 October 20X3 a fire destroyed a considerable part of the inventory and all inventory records. Her trading a/c for the year ended 31 October included the following. $ $ Sales: 281, 250. Opening inventory at cost: 183,600. Purchases: 249,200. Goods available for sales. 432,800. Closing inventory. (204,600) COGS. 228,200 Gross profit 53,050. What inventory loss has occurred? A. $61,050 B. $87,575 C. $40,700 D. $110,850 (my calculations gave me A but the answer according to the revision kit is C)

  4. avatar says

    Hi John,

    I know this has been abundantly asked before, and i do understand the concept of question 3, the part i don’t understand is why the sales would increase by 10,000 if revenue increases by the same amount? Ignoring the other discovery (CI overstated by $5000), if we assume the business operates on a fixed gross profit margin (which is the case no?), wouldn’t the gross profit increase by only the gross profit percentage of the revenue?

    Cheers

  5. avatar says

    Kindly help with this question

    Payables: opening balance = $4,000; closing balance = $5,000. Payments made = $20,000
    Receivables: opening balance = $7,000; closing balance = $9,000. All sales are on credit.
    Inventory: opening balance = $5,500; closing balance = $2,000.
    Gross profit percentage = 25%
    How much cash has been collected for from customers?

    A- $30,000
    B- $32,000
    C- $28,000
    D- $26,000

    • Profile photo of John Moffat says

      I do not know where you found this question, but either you have typed some of the question wrongly, or the question is wrong because none of the four answers are correct!
      (I am guessing that the opening inventory should be $5,000 and not $5,500).

      However, using the figures as you have typed them:

      From the payable information, you can calculate the total purchases for the year. Best way is to do a t’account for payables – you know the opening and closing balances, you know the cash paid, and so the missing figure will be the purchases. (It comes to $21,000)

      Now you know the purchases, you can calculate the cost of goods sold. This is always equal to opening inventory + purchases – closing inventory. (In this example it comes to $24,500).

      Now you know the cost of goods sold, and you know the gross profit %, you can calculate the sales figure. It will be 100/75 x cost of goods sold (which in this example comes to $32,667)

      Now that you know what the sales are, and you know the opening and closing balances on receivables, you can calculate the cash received from customers. (In this example it comes to $30,667)

      (If the opening inventory is actually $5,000 and not $5,500, then the approach remains the same, but you will end up with the cash received as $30,000. which is answer A)

      • avatar says

        Thanks, the question is from Fa 2 notes which I have downloaded from open tution, I am confused that if it says gross profit percentage, does it means mark-up or margin ?

      • avatar says

        Kindly help with this question

        Opening payables balance = $4,000
        Closing payables balance = $6,000
        Payments to credit suppliers = $12,000
        Cash purchases = $1,000
        What is the total purchases figure?

        A- 7,000
        B- 10,000
        C- 11,000
        D- 6,000

      • Profile photo of John Moffat says

        Hi again!

        I have checked the questions and answers in the FA2 notes, and there are mistakes (it is clear what the mistakes are when you look at the workings in the answers at the back).

        In the case of the first problem, the closing inventory in the question should be 2500 (not 2000) and then the correct answer would be 32,000.

        In the case of the second problem, the correct answer is 15,000 (credit purchases of 14,000 + cash purchases of 1000).

        I do apologise. I will speak to the person who wrote the notes, and have the errors corrected immediately.

        Thank you for spotting them :-)

  6. avatar says

    Hello John,
    Quick question on test number 1. If sales is 612 at 25% markup that would mean we would then find 100% of this and get 489600. Our closing inventory added on and then subtracting opening sales and inventory gives us 26400 missing…how is it that the answer it says we should get is 57000?

    I have been racking my brain for a while on this one.

    Cheers,
    Neil

  7. avatar says

    Dear sir, i have a little problem with example 2
    Peter has sales of dollar 120,000. his gross profit is 20%.

    your working is

    Sales 120,000
    Profit 20% of 120,000 is 24,000
    so cost of sales is 96,000.

    But i have a little problem with 20% of 96,000 is 19,200 profit and the total will be 115,200 (why ?)

    but if it is done like this: 100/120 x 120,000 = 100,000 cost of sales
    20% of 100,000 = 20,000 and therefor 100,000+ 20,000 = 120,000
    Is it right the way i have done it?

    • Profile photo of John Moffat says

      A margin (or gross Profit %) is always a % of sales.

      A mark-up is always a % of cost.

      So…if sales are 120,000 and there is a gross profit (or margin) of 20%, then the profit is 20% x 120,000 = 24,000.

  8. avatar says

    please can the 2&3 from the test be explained?

    For question 2 I had the inventory total of $836200
    add : purchase of goods $8600
    less sales of goods $14,000
    less goods returned $700
    the revised inventory total of $830,100
    which I have obviously calculated incorrectly as it is not one of the options but after looking at the answers I am unable to see how you would arrive at the figure of $838,100.

    For question 3
    I increased the revenue total by $10000 to $90,000
    I decreased the gross profit by $5000 to $15,000
    I calculated the percentage as 16.67 which is option B but after looking at the answers I am unable to understand how the answer is 27.8%.

    thanks in advance

    • Profile photo of John Moffat says

      For question 2, you have made a couple of mistakes.
      Firstly, you should be working backwards. The inventory of 836200 is on 4 June – you need to work backwards to find out what it was on 31 May.
      So….since they made purchases after 31 May of 8,600, it means that the inventory on 31 May was 8,600 less than it was on 4 June. Similarly you need to add the sales that were made after 31 May and add goods that were returned to the supplier.
      Also, inventory is valued at cost, so when you are adding back the sales they need adding back at cost. $14000 is the selling price and so the cost was 70% x 14,000 = 9800.
      The inventory at 31 May was therefore 836200 – 8600 + 9800 + 700 = $838,100

      For question 3, what you have done is correct, except that you have forgotten that if the revenue is 10,000 higher then the profit will also be 10,000 higher. This means that the revised profit will be $25,000 and therefore the profit percentage will be 25000/90000 = 27.8%

  9. avatar says

    a sole trader fixes her prices by adding 50 per cent to the cost of all goods purchased. on the 31 october 20×3 a fire destroyed a considerable part of the inventory and all inventory records. her trading account for the year ended 31 october 20×3 included the following figures:
    sales 281250
    opening inventory at cost 183600
    purchases 249200
    less:closing inventory at cost 204600
    228200
    gross profit 53050

    using this information, what inventory loss has occurred?

    Can someone hep me with the workings of this question.

      • Profile photo of John Moffat says

        But you know the cost of what you sell. If you also increase your inventories you will need to purchase more, if you reduce your inventories then you need to purchase less.

      • Profile photo of John Moffat says

        No I do not understand you.
        You said in your last reply that the part you got stuck on was how to adjust for the inventory, but now you say you do not understand the question!

        Here is an example:

        If you sell goods with a cost of sales of $1000, and there is no change in inventories, then you need to need to pay $1000 to buy them (the purchases).

        However if you also want to increase your inventories, then you need to purchase more than $1000 – if you want to increase your inventories by (say) $100, then you would need to make purchases of $1100.

        Similarly, if you reduce your inventories, then you are using some of your inventory to sell, and the purchases will therefore be the cost of sales less the reduction in inventory.

  10. avatar says

    Plz can someone show me how to solve Question 3 from this chapter 18 in the course notes?
    Revenue 80,000
    Gross Profit 20,000
    It was discovered that Revenue was understated by 10,000 and Closing Inventory overstated by 5,000. Find the% change in gross profit after correcting errors?

    • Profile photo of John Moffat says

      The question does not ask for the % change in gross profit. It asks what the gross profit percentage will be.

      The revenue was understated, so the correct revenue is 80,000 + 10,000 = 90,000.

      More revenue means more gross profit, and if the closing inventory is overstated then it means that the profit is also understated. So the correct gross profit is 20,000 + 10,000 – 5,000 = 25,000

      So the gross profit %age is 25,000/90,000 = 27.8%

      • avatar says

        Ohkk…now i see, i did get 27.77 as i was trying to work my way thru to get the answer backwards but i just cudnt understand why the % was taken over the sales revenue of 90k rather than over the older GP value. Thanks a lot sir:):)

      • avatar says

        Hello ACCA Tutor. Thank you for a great lecture and for a great note. I was doing the same question as wang9ackles above. (question 3). I understand the whole point. but I thought when closing inventory is overstated. sales is also overstated and also gross profit. So my answer came up like this.
        Sales = 80000+10000-5000 = 85000
        Profit = 20000+10000-5000 =25000
        then the percentage =25000/85000 =29.4%
        what point did I miss here?

  11. avatar says

    could anyone help me with this question from BPP its as follow
    Bob is a sole trader.He has calculated a cost of sales figure for the year, which is $ 342,000.Bob received a payment of $8,030 into the business bank account for goods sold on a special deal to Harry and this amount has been included within sales.The figure of $ 8,030 was calculated by adding a mark up of 10% to the cost of the goods. His gross profit percentage on all other goods sold was 20% of sales.
    What is the total figure of sales for the year?
    .A) $ 401,640
    B) $ 402,370
    C) $ 418,375
    D) $ 426,405
    The answer is D

    Please help me out

    • Profile photo of John Moffat says

      8,030 was a special deal. 8,030 is the selling price and there is a mark-up of 10%.
      So the cost of these was 8,030 / 1.10 = 7,300

      The total cost of sales was 342,000, but this includes the 7,300 above. So the cost of other goods was 342,000 – 7,300 = 334,700.
      These was sold at a gross margin of 20% and so the sales value was 334,700 / 0.8 = 428,375.

      Add the special sales to this: 418,375 + 8,030 = 426,405

    • avatar says

      @zinnat10,
      open inventory 318000
      + purchases 412000
      – cogs 459000 ( cogs=612000-0.25*612000)
      closing inventory 214000
      => loss in inventory is 57000 (318000+412000-459000-214000)
      hope that helps

    • Profile photo of John Moffat says

      @nhs14, The cost of sales at the moment is 40,000 + 60,000 – 50,000 = 50,000.

      Sale prices are 2 times the cost, and so either sales should be 100,000 (2 x 50,000), or cost of sales should be 47,500 (95,000 / 2 ).

      Choice 1 would mean that the sales would have been 100,000, so that is correct.
      Choice 3 would mean that the cost of sales would be 47,500 so that is correct.

      Neither of the other two choices would work.

    • Profile photo of John Moffat says

      @williamansah, For question 3:
      Firstly, revenue was understated by 10,000.
      This means that the correct revenue should be 80000 + 10000 = 90000.
      It also means the profit would be 20000 + 10000 = 30000

      Secondly, closing inventory was overstated by 5000. Reducing the closing inventory will reduce the profit, so this would make the profit 30000 – 5000 = 25000

      So, the correct gross profit percentage is 25000 / 90000 = 27.8%

      For question 4:

      If sales are 193200, the cost of sales is 100/142 x 193200 = 136056.

      Since inventory fell by 13200, this means that 13200 of the sales came from inventory and only the remainder needed purchasing.

      So, the purchases are 136056 – 13200 = 122856

  12. Profile photo of mohammadbangash says

    Silver Co made sales of $193200 during the year ended 31 August X1.Inventery decreased by $13200 over the year and all sales were made at a mark up of 42%.

    What was the cost of purchases During the year, to the nearest $1000?

    A) $ 149000
    B) $ 136000
    C) $ 123000
    D) $ 109000

    can any one help me with this question

    • avatar says

      @mohammadbangash,

      The sales made on 42% above from cost
      thats mean sales itself is 142 %
      co we fine find cost because cost always be equal to 100 %
      Cost of good sold = 193200 * 100 / 142
      cost of good sold = 136056 ( round off)
      cost of good purchase = cost of good sold – decrease in inventory
      cost of good purchase = 136056 – 13200
      cost of good purchase = 122856
      have to give ans in neares $ 1000 so 122856 will become 123000
      answer is C

  13. Profile photo of Sangria9 says

    Could anyone help with Question 3 from Course Notes, please?
    The draft accounts of Anthea Co. for the year ended 31 December 20X9 include the following:
    Revenue $80,000
    Gross profit $20,000
    It was subsequently discovered that revenue had been understated by $10,000 and closing inventory overstated by $5,000. After correction of these errors the gross progit percentage will be:
    A. 33,3%
    B. 16,7%
    C. 31,3%
    D. 27,8%

    As for my considerations the answer should be B. 16,7%:
    Corrected revenue should be: $80,000 + $10,000 = $90,000 (revenue is higher then we received from draft accounts).
    Corrected gross profit should be: $20,000 – $5,000 = $15,000 (closing inventory should be smaller -> so COGS should be higher -> gross profit should be smaller).
    Gross profit percentage: $15,000 / $90,000 = 16,7%.

    But the answer in Course Notes shows us D… :(

      • avatar says

        Hi,

        Could you please explain to me why you were adding the overstated closing inventory back to the (80-20).
        I found this statement ‘To calculate the cost of goods sold, you take the beginning inventory, add purchases and then subtract ending inventory. If the ending inventory is overstated, it makes the cost of goods sold appear lower than it really is.’ So should not the answer be B as Sangria9 says. Please help.

      • Profile photo of John Moffat says

        Firstly, revenue was understated by 10,000.
        This means that the correct revenue should be 80000 + 10000 = 90000.
        It also means the profit would be 20000 + 10000 = 30000

        Secondly, closing inventory was overstated by 5000. Reducing the closing inventory will reduce the profit, so this would make the profit 30000 – 5000 = 25000

        So, the correct gross profit percentage is 25000 / 90000 = 27.8%

    • Profile photo of Sangria9 says

      @amr1974,
      Question 2:
      Initial figure for inventory on 4 June 2008: $836,200. This should be corrected with operations that occured between 31 May and 4 June:
      ($8,600) – purchases of goods: on 31 May 2008 this wasn’t in inventory;
      $9,800 – sales of goods: $14,000 * 70% = $9,800: on 31 May 2008 this amount was in inventory;
      $700 – goods returned by X to supplier: on 31 May 2008 this was in inventory.

      Adjusted figure in the financial statement for inventories at 31 May 2008:
      $836,200 – $8,600 + $9,800 + $700 = $838,100 (answer A.)

  14. Profile photo of Sangria9 says

    Sorry, correct figure is $418,375 (instead of $427,500)
    $342,000 includes $7,300 (8,030/110%) of special order.
    Total sales for the year $426,405 includes two points:
    1) 7,300*110% = $8,030 (mark-up 10%)
    +
    2) (342,000 – 7,300) / 80% = $418,375 (margin 20%)

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