Question

Required: Advise Sport Pty Ltd as to the trading stock implications for the tax year.

Sport Pty Ltd is a retailer that sells sporting shoes and clothes. The following information applies to the relevant tax year:

• Purchases of new sports shoes and clothes for sale: $120,000.
• Sales of sports shoes and clothes: $300,000.
• Closing stock value for end of year prior to the relevant tax year: $400,000.
• Trading stock values at end of relevant tax year:
  • sports shoes: cost of $100,000, replacement value $90,000, market selling value $200,000; and
  • sporting clothes (non-footwear): cost of $200,000, replacement value of $220,000, market selling value $300,000.

subject principles of income tax

Answer 1

Sport Pty Ltd
Taxable Profit
Sales		$3,00,000
Less: Cost of goods sold		$2,30,000
Cost of goods sold
Opening Inventory	$4,00,000
Add Purchases	$1,20,000
Total A	$5,20,000
Less : Clossing Inventory
i) Sport Shoes	$90,000		Cost or Market value is lower
ii) Non Foot ware items	$2,00,000		Cost or Market value is lower
Total B	$2,90,000
Cost of goods sold (A-B)	$2,30,000
Gross Profit		$70,000
Thus the tax implication is as above, Its gross Proft wil be $ 70,000
As a general principal, to reach at the cost of goods sold is to be determined, for this Inventory is to be valued at cost or market value which ever is lower. Thus to determine Inventory and its valuation plays a great role in deciding cost of goods sold. once the inventory is valued and sales figure is available, then comany or tax payer may find out taxable income.
The method of inventory valution must be followed consistently year after year. The valuation method may be LIFO, FIFO, Weighted average or Particular identification of inventory sold and balance in stock.