1.

A trader reports opening inventory at £122,800, Purchases for the year at £824,700, and closing
inventory at £154,200. During the year goods costing £24,800 were lost, others costing £12,500 had
been removed for own use by the proprietor, and some costing £10,000 were gifted to charity. What is
the cost of sales?

a. £770,800

b. £783,300

c. £746,000

d. £758,500

2. Which of the following expenses would you regard as part of the cost of goods sold?

A. Insurance of goods in the warehouse against fire and theft

B. Advertising the goods for sale

C. Packing the goods for delivery to customers

D. Insurance and freight on importing goods for sale.

Explanation: Insurance and freight on importing goods would be included in the cost of goods sold.

3. If carriage inwards amounting to £57,800 is included as part of carriage outwards, the impact of the
error would be:

A. gross profit as well as net profit will be understated.

B. gross profit as well as net profit will be exaggerated.

C.gross profit as well as net profit will not be affected.

D. gross profit will be exaggerated but net profit unaffected.

Explanation: Carriage outwards is a distribution cost that should be deducted from the gross profit. If it
is included with the Carriage inwards the expense charged in arriving at the gross profit will be
overstated. However, there is no effect on the net profit.

4. How would you account for the goods removed for own use by the proprietor?

A.Credit the Purchases account and debit the Drawings account with the cost price of the goods.

B.Credit the Trading account and debit the Drawings account with the cost price of the goods.

C.Credit the Opening Inventory account and debit the Drawings account with cost price of the goods.

D.Credit the Sales account and debit the Drawings account with the sale price of the goods.

Explanation: Goods taken by the proprietor for own use should be credited to the Trading account in
order to arrive at the correct gross profit figure. It is then deducted from the gross profit to arrive at the
net profit

5. If closing inventory is accounted for as £240,000 instead of £180,000:

A. gross profit and net profit would both be understated.

B. gross profit as well as net profit will be exaggerated.

C. gross profit will be exaggerated but net profit correctly reported.

D. gross profit will be exaggerated and net profit understated.

Explanation: If the closing inventory is overstated, the cost of goods sold will be understated and so the
gross profit and net profit will be overstated by the amount of the overvaluation. In this case the gross
profit and net profit would be overstated by £60,000.

6. Which of the following will result from a failure to account for goods removed by the proprietor for
own use?

A.Net profit will be understated but the closing balance in the Capital account will not change.

B.It would not make any difference to the net profit for the year or the Capital account balance.
 C.Both net profit and the Capital account balance at year-end will be understated.

D.Net profit will remain the same but the closing balance in the Capital account will be overstated.

Explanation: If goods taken by the proprietor are not reported in the Income Statement, then the cost of
goods sold will be inflated by the amount taken and the net profit will be understated. However, as far
as the Capital account is concerned its balance will not be affected. This is because if the goods taken
had been accounted for then the net profit transferred to the Capital account would be higher but an
identical amount would be deducted as drawings

7. If goods lost are not accounted for:

A.gross profit and net profit will be understated.

B.gross profit will be understated but net profit will be correctly reported.

C. gross profit will be overstated but net profit will be correctly stated.

D.gross profit as well as net profit will be overstated.

Explanation: The cost of goods lost should be deducted from purchases when calculating the cost of
sales. If the cost of goods lost is not deducted then the cost of goods sold is higher by the amount of the
loss. If the cost of sales is higher than it should be then the gross profit will be understated. The net
profit will not be affected by failing to disclose the loss

8. Which of the following is incorrect? The cost of sales is:

A. sales – return inwards – gross profit.

B. opening inventory + purchases – closing inventory.

C. opening inventory + purchases + carriage outwards – closing inventory.

D. opening inventory + purchases + carriage inwards – closing inventory.

Explanation: Carriage outwards should appear after the calculation of the cost of sales. It is a selling and
distribution cost and should be deducted from the gross profit when arriving at the net profit.

9. Having reported its financial performance in the year a business finds that goods costing £74,500
removed by the owner have not been accounted for. The effect of correcting this error would be?
 A.gross profit increases by £74,500; but no change in net profit.

B.gross profit as well as net profit decrease by £74,500.

C. gross profit increases by £74,500 and net profit Increases by the same amount.

D. no change in gross profit and net profit.

Explanation: The £74,500 should have been deducted from the Purchases thereby reducing the cost of
sales figure and causing the gross profit to be £74,500 higher. The net profit will also then be £74,500
higher. The debit for the £74,500 will be in the Drawings account

10. On the basis of the information provided below a business reported the gross profit for the period as
£34,000 and net profit as £14,000. Since then it has been discovered that closing inventory is in fact
£280,000. The effect of correcting this error is:

Opening Inventory 354, 000

Purchases 712, 000

Sales 900, 000

Closing 200, 000

A. gross profit increases by £80,000 and net profit remains unchanged.

B.gross profit as well as net profit remain unchanged.

C.gross profit decreases by £80,000 and net profit remains unchanged.

D. gross profit as well as net profit increase by £80,000.

Explanation: The gross profit is currently (900,000 – (354,000+712,000-200,000)) = £34,000 and the net
profit is (34,000-20,000) = £14,000. If the closing inventory is £280,000 the recalculated profit figures are
gross profit (900,000 – (354,000+712,000-280,000)) = £114,000 and the net profit (114,000-
20,000)=£94,000. Both profit figures have increased by £80,000.

11. Which of the following statements is incorrect?

A. Net profit is gross profit less all expenses other than those included in the cost of goods sold.

B.Carriage inwards is included in the Income Statement as part of cost of sales.

C. Gross profit is the difference between purchases and sales.

 D. Carriage outwards is shown in the Income Statement as a deduction from gross profit.

Explanation: Gross profit is not the difference between sales and purchases unless there is no opening or
closing inventory. If there is either opening or closing inventory then the purchase figure needs to be
adjusted to arrive at the cost of sales.

12. A retailer of designer men's-wear reports as stated below. The closing inventory includes £30,000
being the cost of 200 pairs of trousers damaged in storage. If repaired at a cost of £40 each, the trousers
may be sold for £100 a pair. What would be the gross profit for the year and the inventory value in the
year-end Statement of financial position?

Opening Inventory 184, 000

Purchases 752, 400

Sales 858, 000

Closing 248,000

A.Gross profit = £83,000 and inventory value = £248,200

B. Gross profit = £101,000 and inventory value = £230,200

C. Gross profit = £101,000 and inventory value = £248,200

D. Gross profit = £83,000 and inventory value = £230,200

Explanation: There is £30,000 damaged goods in the closing inventory. If these were lost totally the
closing inventory would be £218,200. However, the business is able to sell for £20,000 after incurring
costs of £8,000 i.e. the Net Realisable Value (NRV) is £12,000 giving a total closing inventory value of
£230,200. The Gross profit will be (858,600-(184,800+752,400-230,200)) = £151,600.

13. The year-end trial balance of a trader includes the balances stated below. 75% of carriage is for
delivering goods to customers. The cost of closing inventory has been ascertained to be £185,000.
However it includes damaged goods at their cost price of £36,000. If repaired at a cost of £1,800 these
goods could be sold for £15,000. Calculate the gross profit for the year and the value at which closing
inventory should be reported on the year-end Statement of financial position.

Opening Inventory 128, 000

Purchases 594, 000

Opening Inventory 128, 000

Sales 790,000

Closing 84, 000

A. Gross profit = £139,200 and inventory value = £198,200

B. Gross profit = £162,000 and inventory value = £185,000

C. Gross profit = £162,000 and inventory value = £162,200

D. Gross profit = £139,200 and inventory value = £162,200

Explanation: The unadjusted Gross profit is (790,000-(128,000+594,000+21,000-185,000)) = £232,000

and the closing inventory is £185,000. However, this includes inventory costing £36,000 which has a net
realisable value of (15,000-1,800) = £13,200.

The adjusted closing inventory is (185,000-36,000+13,200) = £162,200.

The revised gross profit figure is (790,000-(128,000+594,000+21,000-162,200)) = £209,200.