chapter8-inventory

The cost of goods sold is calculated as: Opening inventory + purchases – closing inventory. Closing inventory: Goods not sold at the period end and so still be held in inventory as a current asset. The purchase cost of these goods should not be included in the cost of sales of the period. Goods brought forward from the previous period are opening inventory. This is added to purchases in the cost of sales calculation in the income statement.
Example 2: closing inventory (p.125)
Question: We shall continue the example of the Umbrella Shop into its next accounting year, 1 October 20X5 to 30 September 20X6. During the course of this year, Perry P Louis purchased 40,000 umbrellas at a total cost of $95,000. During the year he sold 45,000 umbrellas for $230,000. At 30 September 20X6 he had 5,000 umbrellas left in inventory, which had cost $12,000. What was his gross profit for the year?
Solution:
Example 2: closing inventory (p.125)
In this accounting year, he purchased 40,000 umbrellas to add to the 10,000 he already had in inventory at the start of the year. He sold 45,000, leaving 5,000 umbrellas in inventory at the year end. Once again, gross profit should be calculated by matching the value of 45,000 units of sales with the cost of those 45,000 units. The cost of sales is the value of the 10,000 umbrellas in inventory at the beginning of the year, plus the cost of the 40,000 umbrellas purchased, less the value of the 5,000 umbrellas in inventory at the year end. $ $ Sales (45,000 units) 230,000 Opening inventory (10,000 units) * 20,000 Add purchases (40,000 units) 95,000 115,000 Less closing inventory (5,000 units) 12,000 Cost of sales (45,000 units) 103,000 Gross profit 127,000
Example 1: closing inventory (p.124)
Question: Perry P Louis, trading as the Umbrella Shop, ends his financial year on 30 September each year. On 1 October 20X4 he had no goods in inventory. During the year to 30 September 20X5, he purchased 30,000 umbrellas costing $60,000 from umbrella wholesalers and suppliers. He resold the umbrellas for $5 each, and sales for the year amounted to $100,000 (20,000 umbrellas). At 30 September there were 10,000 unsold umbrellas left in inventory, valued at $2 each. What was Perry P Louis's gross profit for the year?
Example: Cost of goods sold and variations in inventory levels (p.126)
Solution:
The cost of carriage inwards and outwards
Carriage inwards is included in the cost of purchases.
Cost of goods sold
Formula:
Example: Cost of goods sold and variations in inventory levels (p.126)
Question: On 1 January 20X6, the Grand Union Food Stores had goods in inventory valued at $6,000. During 20X6 its proprietor purchased supplies costing $50,000. Sales for the year to 31 December 20X6 amounted to $80,000. The cost of goods in inventory at 31 December 20X6 was $12,500. Calculate the gross profit for the year.
Example 1: closing inventory (p.124)
Solution:
Perry P Louis purchased 30,000 umbrellas, but only sold 20,000. Purchase costs of $60,000 and sales of $100,000 do not represent the same quantity of goods. The gross profit for the year should be calculated by 'matching' the sales value of the 20,000 umbrellas sold with the cost of those 20,000 umbrellas. The cost of sales in this example is therefore the cost of purchases minus the cost of goods in inventory at the year end. $ $ Sales (20,000 units) 100,000 Purchases (30,000 units) 60,000 Less closing inventory (10,000 units @ $2) 20,000 Cost of sales (20,000 units) 40,000 Gross profit 60,000
Carriage outwards is a selling expense.
Example: carriage inwards and carriage outwards (p.126-127)
Question:
Gwyn Tring, trading as Clickety Clocks, imports and resells clocks. He pays for the costs of delivering the clocks from his supplier in Switzerland to his shop in Wales. He resells the clocks to other traders throughout the country, paying the costs of carriage for the consignments from his business premises to his customers. On 1 July 20X5, he had clocks in inventory valued at $17,000. During the year to 30 June 20X6 he purchased more clocks at a cost of $75,000. Carriage inwards amounted to $2,000. Sales for the year were $162,100. Other expenses of the business amounted to $56,000 excluding carriage outwards which cost $2,500. Gwyn Tring took drawings of $20,000 from the business during the course of the year. The value of the goods in inventory at the year end was $15,400. Required Prepare the income statement of Clickety Clocks for the year ended 30 June 20X6.