Registered Posts: 21 Dedicated contributor ? ? ?
I'm looking through the Osborne Book for FRA and I'm working on question 13.2 on the incomplete records chapter. The question is :-

Sales for the year are £100,000
Gross profit margin is 25%
Opening Stock is £10,000
Closing Stock is £12,000

What are the purchases for the year?

I got the answer £73,000 but the answer as per the text book is £77,000??

I've rang my tutor who tried explaining it to me but I just didn't understand and he said it was a case of trial and error???

• Registered Posts: 70 ? ? ?
Sales revenue is £100,000 but there is a GPM of 25% so the real cost is £75,000

Closing stock is £12,000.
12,000 + 75,000 = 87,000 less opening stock = £77,000.

I think of it as the equation on the P+L account.

Sales - opening stock - purchases = closing stock and just juggle it about to find what I want.
• Registered Posts: 21 Dedicated contributor ? ? ?
Thank you so much!

All makes sense now
• Registered Posts: 122 ? ? ?
Sales 100,000 - Opening stock 10,000 + Purchases - closing stock 12,000= cost of sales 75,000

Purchases therefore = 27,000

I think the answer in the book is wrong?
• Registered Posts: 70 ? ? ?
Sales 100,000 - Opening stock 10,000 + Purchases - closing stock 12,000= cost of sales 75,000

Purchases therefore = 27,000

I think the answer in the book is wrong?

Your answer is wrong, you have done the addition and subtraction wrongly. You also needed brackets in your equation because it's really confusing otherwise.
• Registered Posts: 254
No, the book is right.

The best way to do this, is to write out a rough P&L, and enter in the figures that you know.

The gross profit is 25% of the total sales ie £25,000. You then deduct this from the sales figure to give you a cost of sales of £75,000.

You then use this figure and reverse the stock calculations, ie add closing stock of £12,000 and deduct opening stock £10,000, this gives you the missing purchases figure of £77,000.

You can check this is correct, by doing the normal calcluations of all the now available figures.
• Registered, Tutor Posts: 21 Dedicated contributor ? ? ?
The sales margin(profit) is 25% of 100,000 = 25,000

Now cost of sales + profit = selling price

So cost of sales = selling price - profit = 100,000 - 25,000 = 75,000

Cost of sales = opening stock + purchases - closing stock

Hence 75,000 = 10,000 + purchases - 12000

75,000 + 2,000 = purchases

Purchases = 77,000