Section A

A company has an opening inventory of $40,000, purchases of $250,000, and closing inventory of $50,000. Sales revenue is $300,000. What is the company's gross profit margin?

Answer options:

25%

20%

16.7%

80%

How to approach this question

1. Calculate Cost of Sales (Opening Inventory + Purchases - Closing Inventory). 2. Calculate Gross Profit (Revenue - Cost of Sales). 3. Calculate Margin (Gross Profit / Revenue * 100).

Full Answer

B.20%✓ Correct

Cost of Sales = Opening Inventory ($40,000) + Purchases ($250,000) - Closing Inventory ($50,000) = $240,000. Gross Profit = Revenue ($300,000) - Cost of Sales ($240,000) = $60,000. Gross Profit Margin = ($60,000 / $300,000) * 100 = 20%.

Common mistakes

Calculating mark-up (GP / COS) instead of margin (GP / Revenue).

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Practice the full ACCA FA — Financial Accounting Practice Exam 6

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