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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.

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