Question

Financial Accounting II question

Wanabidii is a sole trader in a local market. He made a mistake while taking stock at the end of year 2017 and 2018. In the year 2017 the stock had been undervalued by ksh 90 000 and overvalued by ksh 270 000 in 2018. The following   figures were extracted using the above stated valuations (All figures are in khs. ‘000’

    Year                           2 017               2 018              2 019

Opening inventory             900                   1 800              2 520

Purchases                        6 300              7 740              6 930

Less: closing inventory       (1 800)        (2 520)                  (2 070)

Cost of sales                      5 400              7 020              7 380

Sales                                8 100          11 250                 10 800

Gross profit                        2 700                4 230                  3 420

Required:

1. To calculate the correct figures of gross profit for each of the three years affected by the errors in inventory   [5 marks]
2. Using the correct figures in the revised trading accounts, calculate for each year

1. The percentage of gross profit to sales   [3 marks]
2. The rate of turnover of inventory   [3 marks]

Answer 1

Solution ;

A.

1. Gross profit of 2017

Opening inventory      -   900

      Purchase                  -   6300

Less.Closing inventory (1800+90) - (1890)

( Adjusting undervalued stock )

   Cost of sale ( 900+6300-1890 ) - 5310

Sales                                      - 8100

Gross profit                                 - 2790

( Sales - Cost of sale )

2. Gross profit of 2018

          Opening inventory   - 1890

             Purchases            - 7740

Less. closing inventory ( 2520 - 270 )    -    (2250)

( Adjusting over valued stock )

Cost of sale (1890+7740-2250)                - 7380

                                  Sales                  -11250

   Gross profit - 3870     

( sales - cost of sales )

3. Gross profit of 2019

   Opening inventory    - 2250

Purchase    - 6930

Less .Closing inventory - (2070)

Cost of sale (2250+6930-2070)    - 7110

          Sales - 10800

                        Gross profit           -   3690

( sales - cost of sales )

B.

1. The percentage of Gross profit to sale 2017

       Gross profit ratio = ( Gross profit / Sales ) * 100

                                = ( 2790 / 8100 ) * 100

                                = 34.44 %

2. The percentage of Gross profit to sale 2018

        Gross profit ratio = ( Gross profit / Sales ) * 100

                                 = ( 3870 / 11250 ) * 100

                                  = 34.4 %

3. The percentage of Gross profit to sale   2019

         Gross profit ratio   = ( Gross profit / sales ) * 100

                                   = ( 3690 / 10800 ) * 100

                                   = 34.16%

C.

1. The rate of turnover of inventory 2017

       Inventory turnover ratio = Cost of revenue for operations / Closing inventory

                                        = 5310 / 1890

                                         = 2.8 times

2. The rate of turnover of inventory 2018

     Inventory turnover ratio = Cost of revenue for operations / closing inventory

                                        = 7380 / 2250

                                        = 3.28 times

3. The rate of turnover of inventory 2019

     Inventory turnover ratio = Cost of revenue for operation / Closing inventory

                                       = 7110 / 2070

                                       = 3.43 times