AAT Practice Test 1 Q1.2 ON Cost of goods sold

GJM

Hi everyone

I have my FAPR exam on Monday morning and am really hoping someone can explain to me where I am going wrong on the following question.

The question is 1.2 of the first practice assessment available on the AAT website:

Task 1.2
You are a trainee accounting technician who prepares final accounts for a number of sole trader clients.

You have the following information about a business for its year ended 31 March 20X7:

• It is not registered for VAT.
  
• The trader operates with a gross sales margin of 25%.
  
• Inventory at 1 April 20X6 was £5,050.
  
• Sales of £64,900 were made.
  
• Purchases were recorded as £48,390.
  

Using this information, complete the following tasks.

(i) Calculate the cost of goods sold for the year ended 31 March 20X7
(II) Calculate the value of the closing inventory

Model solution answers (no workings provided for either) are:

(i) £48,675
(ii) £4,765

My attempts

(i) cost of sales = (sales/100+margin)100
so, cost of sales = (64,900/125)100 = £51,920

(ii) closing inventory = purchases + opening inventory - cost of sales
so, closing inventory = £48,390 + £5,050 - £51,920 = £1,520

When these were wrong, I thought maybe I was missing a key difference between cost of sales and cost of goods sold but the only formula I can find in my textbook or online for cost of goods sold is: cost of goods sold = opening inventory + purchases - closing inventory, but the question asks you to find closing inventory in part (ii), so I am assuming it doesn't expect you to use it in (i).

I cannot find an alternative formula and just cannot figure out where I am going wrong. Please can someone explain to me what I am missing on this question?

It is worth 9 marks so I am keen to figure it out.

Thanks in advance
Grace

PeterC

I'm afraid you have mixed up margin and markup
cost of sales = (sales/100+margin)100
should be
cost of sales = (sales/100+markup)100

The formula you need is
cost of sales = sales (100 - margin)/100

But this is better dealt with in stages

Profit = 25% x 64,900 = £16,225
Cost of sales = 64,900 - 16,225 = £48,675

Yes, cost of sales and cost of goods sold are the same.

GJM

Thank you so much, Peter!

PeterC

You're welcome