Question

Oakland owns a sports equipment shop. He provides the following information for the financial year ending 1 July 2016. • On 1 July 2016 the inventory was £27,850. • Purchases during the year were £133,780. • Sales during the period were £197,500. Oakland applies a gross profit margin on sales of 40 per cent. • Other expenses amounted to £35,220. • A few days before the end of the year there was a fire that destroyed part of the inventory. A closing inventory of £19,125 remained intact after the fire, and can still be sold. Required: (a) Calculate the value of the inventory that was lost in the fire.

Answer 1

(Amount in £)

Calculation of Value of inventory that was lost in the fire:

Beginning inventory as on 1 July, 2016 = 27850

Purchase during the year = 133780

Gross profit margin = 40% on sales amount

Cost of goods sold = 100 - Gross profit margin = 100% - 40% = 60%

Cost of goods sold =197500*60% = 118500

Cost of goods sold = Beginning inventory+Purchase during the year - Closing inventory

118500 = 27850 + 133780 - Closing inventory =

118500 = 161630 - Closing inventory

Closing inventory should be at the end of the year = 161630 - 118500 = 43130

Actual closing inventory found at the end of the year = 19125

Inventory loss by the fire = Closing inventory should be at the end of the year - Actual closing inventory found at the end of the year

= 43130 - 19125 = 24005.