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Hi I came across this inventory adjustment and its confusing.
The inventory of Highwood was not counted until 4 April 2011 due to operational
reasons. At this date its value at cost was $36 million and this figure has been used in the cost of sales calculation above. Between the year end of 31 March 2011 and 4 April 2011, Highwood received a delivery of goods at a cost of $2·7 million and made sales of $7·8 million at a mark-up on cost of 30%. Neither the goods delivered nor the sales made in this period were included in Highwood’s purchases (as part of cost of sales) or revenue in the above trial balance
Inventory according to the trial balance is 36000According to the solution:
Per trial balance 36000
Received after year end (2700)
Sold after year end 6000
Correct inventory balance 39300I don’t understand why we have deducted goods received? since its an addition to the inventory and why are we adding sales? Since sales means there has been a reduction in the inventory so it should be deducted. and also the inventory count is happening after year end and these transactions relate to that period as well. Kindly explain.
Thanks a lot.
Arooba – were you exempt F3?
John explains all of this in the F3 videos!
Those goods received in April …… we’re trying to find the value of inventory at the end of March so those goods received in April were not in our possession at the end of March.
That’s why we have to deduct them from the April 4 valuation
Similarly, the goods sold in April WERE in inventory at the end of March so we need to add them on to the $36,000 but we need to add these on at cost. That means we need to deduct the mark-up from the $7.8m ((30/130) x 7.8) – that gets us back to $6 million goods that were in inventory as at 31 March
Better?
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