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Yahya says

A sole trader fixes her prices by adding 50 per cent 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 account for the year ended 31 October 20X3 included the following figures:

$ $

Sales 281,250

Opening inventory at cost 183,600

Purchases 249,200

432,800

Closing inventory at cost 204,600

228,200

Gross profit 53,050

Cost of sales = $281,250 x 2/3 = $187,500

Loss of inventory = $228,200 – 187,500 = $40,700

so why is it $281,250 x 2/3 why do we need to multiply 2/3?

John Moffat says

In future you must ask questions like this in the Ask the Tutor Forum, and not as a comment on a lecture.

For every $2 cost, then add on a profit of $1 (50% x $2), and get a selling price of $3.

So for every $3 selling price, the cost is $2. So the cost is always 2/3 x selling price.

Yahya says

thanks John

really appreciate

I almost there!

this is a topic requires a private tutor!

Qahir says

I am still confused with this question.

stion 4 Chapter 18 Silver Co made sales of $193,200 during the year ended 31 August X1. Inventory decreased by $13,200 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 $1,000?

A $149,000 B $136,000 C $123,000 D $109,000

John Moffat says

If there is a mark-up of 42% then for every 100 cost, the profit is 42 and the sales are 142.

So for sales of 193200, the cost must have been 100/142 x 193200 = 136,056

Of that cost, 13,200 came out of inventory and so the remainder of 122,856 were purchases.

Qahir says

Thank you Sir, I got it now

John Moffat says

You are welcome 🙂

Michael says

Hi Sir,

Please do explain question 2 & 3? It’s very confusing too me. I’m having a lot of trouble with it.

John Moffat says

Question 2: We know the inventory on 4 June and we need to work backwards to find out what it was on 31 May. So we need to subtract any purchases made between the dates (8,600) because they were not there on 31 May; we need to add back the cost of any sales made between the dates (70% x 14,000) because they were there on 31 May; and we need to add back any returns made between the dates (700) because they were there on 31 May.

So inventory on 31 May = 836,200 – 8,600 + 9,800 + 700 = 838,100

Question 3: Revenue was understated, so actual revenue is 10,000 higher at 90,000; and actual profit is 10,000 higher at 30,000.

Closing inventory was overstated, so revenue is not affected and stays at 90,000, but cost of sales in understated and therefore profit overstated by 5,000 and should be 25,000.

So profit percentage = 25,000/90,000 = 27.8%

Camelia says

Dear John,

I thank you for all the answers above and for your patience.

The answers were very helpfull. I found more info on this site than on class for F3 I participated within the firm.

John Moffat says

Thanks for the comment – I am please that you find the site useful 🙂

Michal says

Hi Ser,

Relating to Question 3. Why if the revenue has been understated by 10,000, then both revenue and profit will increase by 10,000 ?

If gross profit is 27,8% (as in answer), by adding $10,000 to the revenue shouldn’t we achieve 2,780 more gross profit ? (and not 10,000) ?

John Moffat says

At the moment, the profit is 20,000, the revenue is 80,000, and therefore the cost of sales must be 60,000.

However the revenue should be 10000 more. So the revenue should be 90,000, the costs are 60,000 (ignoring the error with the inventory) and therefore the profit should be 30,000.

More revenue automatically means more profit!

After dealing with the inventory error, the correct profit is 25,000. The correct revenue is 90,000 (as above). Therefore the correct gross profit percentage is 25,000/90,000 = 27.8%

Your last sentence does not make any sense – you are asked to calculate the % after correcting the errors.

Michal says

Thank you Sir, I think I get it. Learning with OpenTuition is a pleasure 🙂

John Moffat says

It’s great to hear that you enjoy it 🙂

rkwasim says

Hi John,

Could you please help me out to solve the following question. A sole trader fixes her prices by 50 per cent to the cost of all goods purchased. on 31 October 20X3 a fire destroyed a considerable part of inventory and all inventory records.

Her trading account for year ended 31 October 20X3 included the following figures:

sales 281,250

O.inventry 183,600

purchases 249,200

closing. inv 204,600

Cos 228,200

Gross profit 53050

John Moffat says

In future please ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.

The cost of sales should be 100/150 x 281,250 = 187,500.

At the moment (using the actual inventory that remains) the cost of sales is 228,200.

Therefore the inventory lost = 228,200 – 187,500 = 40,700

(I assume that is what the question wants – you do not say what is required 🙂 )

Jarmarie says

chapter 18 question 5

how could the answer be A.185 000

opening inventory is 380000

purchases is 480000

sales is 500000 (650000/130) x 100

the closing inventory should be 360000,

instead it is 220000 so 140 was destroyed in the fire. ho

John Moffat says

The answer is 185,000 – you are wrong!

There is a gross profit margin of 30% and so the cost of sales is 70%x$650,000 = 455,000.

The closing inventory should be 380,000+480,000-455,000 = 405,000

In fact it is only 220,000, so the inventory destroyed is 405,000-220,000 = 185,000.

I suggest that you watch the lecture again. ho

Jarmarie says

Ooh no .. My apologies. Swear I saw mark up and not gross profit margin..much thanks

Dan says

Good Morning John – Can you kindly give me some insight into test question 3. cheers

John Moffat says

If the revenue has been understated by 10,000, then both revenue and profit will increase by 10,000.

If inventory has been overstated by 5,000, then cost of sales will be understated and therefore gross profit will be overstated. Revenue will not be affected.

Axell says

Good Evening sir. Kindly explain the mechanism (workings) that allows us to determine that some goods costing $2,500 have been stolen in queation 6. Thank you in advance.

Axell says

Could it be that the items stolen, having a value of $2,500 (and potential sales value of $5,000) represent the amount ”Stolen” ( lost in the process of doing business ) from the sales ? It all sounds glitchy here but I am still confused.

John Moffat says

The sales are 95,000. Because sales are two time the cost, it means the cost of the good sold must have been 47,500.

At the moment, the cost of sales is 40,000 + 60,000 – 50,000 = 50,000.

So it must mean that the goods stolen had cost 50,000 – 47,500 = 2,500

Axell says

I definitely thought so as I laid out a trading income. Thank you once again.

Folisha says

Help with question 4 plzzzzz?

John Moffat says

The sales are 193,200, so the cost of sales were 100/142 x 193,200 = 136056.

Since inventory fell by 13,200, the purchases must have been 136056 – 13200 = 122856

Folisha says

Thanks alot….. i actually got tht answer but its not one of the choices so i thought i did something wrong….

Folisha says

Think you guys made a mistake…… 🙂

John Moffat says

No, I think you made a mistake!

If you read the question it asks for the answer to the nearest $1,000 (which is $123,000)

Folisha says

opppss i missed tht, tht always happen with me, especially in a hurry.

ajaved5 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

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 🙂

ajaved5 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.

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.

Okema24 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)

naeem26 says

hows it worked out?

John Moffat says

The workings are higher up this page (my reply has appeared above the question instead of underneath it 🙂 )