Acca financial Accounting (FA) Study Text ac ca (FA)

 

Mark 

up 

 

 

 $ 

Ratio 

 

$ 

Ratio 

Sales 5,000 

100% 

Sales 

5,000 

125% 

Cost of sales 

4,000 

80%  Cost of sales 

(4,000) 

100% 

 ––––– 

 

 

––––– 

 

Gross profit 

1,000 

20%  Gross profit 

1,000 

25% 

 ––––– 

 

 

––––– 

 

If we know either the mark-up or margin percentage and one of either sales, or 

cost of sales or gross profit we should be able to calculate the remaining 

figures. 

 

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Incomplete records 

336

 

KAPLAN PUBLISHING

 

 

Test your understanding 9 

 

Jethro Longhorn can tell you the following with regard to his business: 

Margin 5% 

Opening inventory $800 

Closing inventory $600 

Purchases $2,840 

Based upon the available information, calculate Jethro’s sales 

revenue and gross profit. 

Missing inventory figures 

Traditionally (before the adoption of powerful computerised accounting 

systems) many business entities did not keep an accounting record of 

inventories. Such entities would keep records of quantities but, given the 

proliferation of raw materials, would not complicate matters by keeping 

accounting records of costs and valuations. Instead business entities would 

perform a year-end reconciliation of valuations using the principles discussed 

earlier in this publication. 

It is also possible to use the methods described in this chapter to calculate the 

value of inventory. Remember that cost of sales is equal (in simple terms) to 

opening inventory + purchases – closing inventory. We have just illustrated how 

to work out cost of sales using margins and mark ups. We can also use ledger 

accounts and cash records to reconstruct total purchases for the year. In 

combination we can use these methods to identify the value of either opening or 

closing inventory.