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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 $281250
cost of sales
opening inventories $183600
purchases $249200
closing inventories $204600
cost of sales $228200
gross profit $53050Using this information, what inventory loss has occurred?
$61,050
$87,575
$40,700
$110,850I wasn’t sure how to tackle this question because it didn’t look like any inventory loss had occurred at all. I wasn’t sure how to find a different cost of sales figure to compare to the one given so the difference would be the inventory loss
They add 50% to the cost in order to get the selling price.
Given that the sales were $281,250, the cost of these sales must therefore have been 100/150 x 281,250 = $187,500.
That means that the closing inventory should have been 183,600 + 249,200 – 187,500 = $245,300.
Given that the actual inventory was only $204,600, they must have lost the difference of 245,300 – 204,600 = $40,700.
Do watch my free lectures on mark-ups and margins where I work through several examples like this. The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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