Prepare Final Accnts for Sole Traders/Partnerships HELP

AngelDust

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

Hi

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.

Thanks

Kkadijat

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

NOTE:
£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

My blog post on Margins and Mark-ups may help with this:

http://aatstudentadvice.blogspot.co.uk/2015_03_01_archive.html

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

Thank you for your replies!