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Below is the question from Kaplan exam kit.
You have been provided with the following incomplete and incorrect extract from the
statement of profit or loss of a business that trades at a mark?up of 25% on cost:
Cost of goods sold:
Opening inventory 12,274
Closing inventory (X)
Gross profit X
You discover that the sales revenue figure should have been $174,825 and that purchase
returns of $1,084 and sales returns of $1,146 have been omitted.
What should be the amount for closing inventory?
The solution given is:
Sales (174,825 – 1,146 : sales return ) = 173,679 usd
Purchases (136,527 – 1,084: purchase return) = 135443 usd
Mark up 25% on cost= 0.25 X
Selling price = 1.25 x= 173,679 usd
x = 138943.2 usd
138943.2 usd= 12,274 usd (opening inventory) + 135443 usd (Purchases) – Closing inventory
Closing inventory= 8773.8 usd
My question is why do not make correction to “opening inventory” (12274 -1084 (purchase return) + 1146 (sales return) =12336 usd ?
The opening inventory will be what actually existed at the start of the year and so that will not be changes.
As shown in the answer, it is the purchases during the year that need changing for the returns during the year, and the sales during the year that need changing for the sales returns during the year – then we will have the correct figure for the sales and purchases during the year.