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Sir,
I have another doubt, regarding the inventory adjustment
The inventory of Highwood was not counted until 4 April 2016 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 and 4 April 2017, 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.
As per Trial balance of HIGHWOOD
Inventory $36m
Cost of sales $207,750,000
Revenue. $339,650,000The solution given, says so
Goods delivered (deduct from closing inventory). (2,700)
Cost of goods sold (7,800 × 100/130) (add to closing inventory). 6000
Net increase in closing inventory. =3,300And this 3,300 is being deducted from cost of sales.
My question
1. It is not mentioned in the question that cost on delivery of goods $2,700 is included in cost of goods sold, then why in the solution it is being deducted from cost of sales?
2. Why the entire $6000 is not deducted from cost of sales( $207,750) & just $3,300?
3. And why $3,300 is added to closing inventory in SOFP?
Thank you1. “It is not mentioned in the question that cost on delivery of goods $2,700 is included in cost of goods sold, then why in the solution it is being deducted from cost of sales?”
This note in the question – “Highwood received a delivery of goods at a cost of $2·7 million” tells us that goods were received in the period from 31 March, 2016 to 4 April, 2016 with an invoice value of $2.7 million
These goods had been included within the physical inventory count as at 4 April, 2016 valued at $36 million but we’re looking for the value of inventory as at 31 March, 2016 and those $2.7 million worth of goods were not in Highwood’s possession as at the end of the accounting year so we need to deduct that $2.7 million from $36 million
“2. Why the entire $6000 is not deducted from cost of sales( $207,750) & just $3,300?
3. And why $3,300 is added to closing inventory in SOFP?”Thinking along the same lines but from the Highwood sales point of view, those goods that were sold in the period from 1 April, 2016 to 4 April, 2016 were not included within the $36 million physical inventory count and valuation but those goods WERE in Highwood’s possession as at the accounting year end 31 March, 2016
So we need to add these goods AT COST PRICE into the closing inventory valuation
We are told that “Highwood made sales of $7·8 million at a mark-up on cost of 30%”
If the mark up is 30% and mark-up is a percentage based on cost, the cost of those $7.8 million must be $7.8 million x 100/130 = $6 million (because the mark-up of 30% on $6 million = $1.8 million giving us a sales value of $7.8 million)
So $6 needs to be added to the value of closing inventory
So we start with $36, deduct $2.7 and add $6 giving us a total of $39.3 million
In aggregate, these two adjustments come to an increase in the closing inventory of $3.3 million and, when adjusted within the cost of sales calculation, will REDUCE cost of sales by that figure and INCREASE the value of Inventory current asset on the statement of financial position
The printed solution gives us (according to your post):
“Goods delivered (deduct from closing inventory). (2,700)
Cost of goods sold (7,800 × 100/130) (add to closing inventory). 6000
Net increase in closing inventory. =3,300And this 3,300 is being deducted from cost of sales.”
I believe that I have covered everything but post again if you’re still not sure
OK?
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