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Question 2.
The inventory value for the finanacial statements for x for the year ended 31 May 2008 was based on an inventory count on the 4 June 2008 which gave an inventory value of $836,200.
Between 31 May 2008 and the 4 June 2008 the following transations took place:
Purchase of goods 8600
sales of goods (profit margin 30% on sales) 14000
Goods returned by X to supplier 700What adjusted figure should be included in the financial statements for the inventories 31 May 2008?
A. $838100
B. 853900
C. 818500
D. 834300.I know the answer is A, but why do we deduct the purchases and add the goods returned to the supplier?
Question 3:
The draft accounts of Anthea Co for year ended 31 December 2009 include the following:
Revenue – $80000
Gross profit – $20000It was subsequently discovered that revenue was understated by $10000 and closing inventory overstated by $5000. After correction of these errors the gross porfit percentage will be?
A. 33.3%
B. 16.7%
C. 31.3%
D. 27.8%The correct answer is D, could someone please explain.
Many thanks!
Q2 – The logic is that we consider the things in reverse , and trying to figure out what is the correct inventory count , if we would have counted on May 31, that is before all the transactions took place.
The purchase of goods after May 31 means that if we would have counted on May 31 , that purchased goods will not have been there , so – 8600.
The sale of goods ( 14000*30%=4200-14000=9800 on costs ) if we have counted on May 31 that sale will not take place until 4 days later that means that goods will count on inventory so + 9800.
The goods return to the vendor will have been there for the count on May 31 so we add them , + 700.
The final answer is 836200-8600+9800+700=838100 answer A.Q3 – If the revenue is understated that means that instead of 80000 the revenue should be 90000.
If the closing inventory is overstated that means that instead of 20000 the gross profit should be 25000.
If we calculate the gross profit % 25000 / 90000 = 27.78 , answer D 27.8%Thank you for the explaination. 🙂
I’m confused about the overstated closing inventory, I thought that it it was overstated we would reduce by $5000 not add?? Because we added the $10000 when the revenue was understated.
Thanks
Gross profit = Open inventory + Purchase – Closing inventory
Let’s say for example that you have the following numbers
Open inventory = 150000
Purchase = 10000
Closing inventory = 15000
By using this numbers you will get a gross profit of 150000+10000-15000=145000
If the closing inventory were overstated by 5000 , then the closing inventory in our example would be 10000.
The gross profit will now be 150000+10000-10000=150000 so 5000 higher than the previous example .
If closing inventory is overstated , the gross profit is understated.
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