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This is the question I got from your mock exam (on the site), i did it wrong, and there is no explanation for the answer, so can you explain this to me a bit?
Flyscreen’s retail department has been asked to give some thought to the likelihood of goods sold being returned. Historically this has not been a problem – over the previous 25 years returns had consistently been around the 7% – 8% mark and a provision in anticipation of 7.5% of retail sales had been made
This year, following much stricter quality control methods being applied in the production department, it is improbable that returns will exceed 2% of sales and could even be as low as 1% of sales and even those returns will more than likely be able to be resold
Last years’ revenues were $24,000,000. Probably as a result of the improvement in Flyscreen’s reputation for quality goods, the sales figure this year has risen to $32,000,000 and gross profit margin improved from 20% to 25%
What figure will appear in the statement of profit or loss for the movement in Flyscreen’s provision for sales returns
Thank you sir.
The provision brought forward is calculated as:
7.5% x $24,000,000 = $1,800,000 revenues and we need to provide for the lost profits
At the rate of 20% gross profit, the brought forward provision will be 20% x $1,800,000 = $360,000
On the same basis, this year’s provision to carry forward is calculated as:
2% x $32,000,000 = $640,000 and, at 25% gross profit, the lost profit will be 25% x $640,000 = $160,000
And that’s a movement of $200,000 credit to the statement of profit or loss
OK?
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