ExpertMedium2 marksMultiple Choice
ACCA · Question 20 · Preparing basic financial statements
Section A
A fire destroyed the warehouse of Phoenix Traders. The following information is available:
Opening inventory: $20,000
Purchases up to the date of the fire: $80,000
Sales up to the date of the fire: $120,000
Phoenix Traders operates with a standard gross profit margin of 25%.
What is the estimated cost of the inventory destroyed in the fire?
Section A
A fire destroyed the warehouse of Phoenix Traders. The following information is available:
Opening inventory: $20,000
Purchases up to the date of the fire: $80,000
Sales up to the date of the fire: $120,000
Phoenix Traders operates with a standard gross profit margin of 25%.
What is the estimated cost of the inventory destroyed in the fire?
Answer options:
A.
$10,000
B.
$4,000
C.
$30,000
D.
$24,000
How to approach this question
Use the margin to find Cost of Sales (Sales * (1 - Margin)). Then use the Cost of Sales formula (Opening Inventory + Purchases - Closing Inventory = Cost of Sales) to solve for the missing Closing Inventory.
Full Answer
A.$10,000✓ Correct
Gross profit margin is 25% of sales. Therefore, Cost of Sales is 75% of sales. Cost of Sales = 75% * $120,000 = $90,000.
Cost of Sales formula: Opening Inventory + Purchases - Closing Inventory = Cost of Sales.
$20,000 + $80,000 - Closing Inventory = $90,000.
$100,000 - Closing Inventory = $90,000.
Closing Inventory = $10,000.
Common mistakes
Confusing margin (percentage of sales) with mark-up (percentage of cost).
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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