Prepare Final Accnts for Sole Traders/Partnerships HELP

Hi, I'm stuck on the following question, can someone please shed some light?

Miranda includes a profit margin of 40% in the price of each item sold. She has suffered a fire at the year end which destroyed stock.

It asks what the value of closing stock before the fire is?

The amount to be claimed from the insurance company?

Following info available:

Sales to customers for the year amounted to £360,000
Purchases of goods for resale totalled £218,000
Opening inventory was £12,000
Remaining stock that survived the fire is valued at £3000

Can someone clarify how to calculate above two questions? I've worked out COGS is £227,000.

Thanks in advance


  • LearningAcademy
    LearningAcademy Registered Posts: 18

    1) 'Margin' is based on sales. Hence, GP for the year would be £144000 (40% of Sales). The COGS would, therefore, be £216000 (Sales minus GP).

    2) Closing stock before fire should, therefore, be £14000 (Op Inv + Purchases - COGS).

    3) Since the remaining stock was £3000, stock destroyed in fire should be: £11000

    Trust, this helps.

  • Kkadijat
    Kkadijat Registered Posts: 28
    1) Calculate the GP
    sales £360000*40% = £144000

    2) Cost of good sold is £216000 (ie £360000-£144000)

    3) Closing stock before fire:
    opening inventory £12000+ purchases £218000-£3000(remaining stock) =£227000
    So, closing stock before the fire is £227000-£216000=£14000

    4) Amount to be claimed from insurance company will be : Closing inventory before fire LESS remaing inventory after fire- £14000-£3000=£11000

    £227000 is the COGS AFTER the fire because you only had £3000 stock left which is not the actual closing inventory AND

    £216000 is the ACTUAL COGS because you've got your sales figure and margin - refer to calculation 1 & 2 above.

    Hope this help.
  • welshwizard
    welshwizard Registered Posts: 465 Dedicated contributor 🦉
    edited June 2015
    My blog post on Margins and Mark-ups may help with this:

    Using a Margin Model:

    Sales 100%
    Cost of sales 60%
    Profit 40%

    Profit on the stated sales should have been £360,000 x 40% margin = £144,000 which means Cost of Goods Sold would be £216,000.

    However, if we calculate the cost of goods sold based on Opening inventory + Purchases - Closing inventory we see that:

    £12,000 + £218,000 - £3,000 = £227,000

    Obviously we have a difference here - the difference being £11,000 (the value of the inventory destroyed by the fire).

    You can check this by recalculating the Cost of goods sold:

    Opening + Purchases - (Closing ivnentory + Destroyed inventory)

    £12,000 + £218,000 - (£3,000 + £11,000) = £216,000 (the figure our Margin Model says we should have for our cost of goods sold).

    It's always good to work your answer back to check that you've not made an error.
  • AngelDust
    AngelDust Registered Posts: 30
    Thank you for your replies!
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