April 2009 Q19

Does anyone know why in the solution in the examiners' report they do not include the inventories at year end in their cost of sales for calculating the income statement?

Every other time I have calculated cost of sales it has been
Opening stock + purchases - closing stock.

Are we supposed to assume the inventory was the same at the start of the year? It seems a bit much to not make this explicit, since I assumed it was 0 at the start of the year and 16 at the end.
Any help would be appreciated.

 

Hello there,

That formula u speak of for calculating cost of stock is only applicable when you have explicit values of either

1. Opening stock, PURCHASES, and closing stock

or

2. Purchases and Increase in stock (Opening Less Closing)

The question explicitly states in the trial balance that "Raw materials consumed" is 440, so this would imply that this level of input was required to acheive the sales, so this figure can be used for the cost of stock.

Good luck in the forthcoming exam.

 

It still doesn't seem right to me, to write off the value of the inventories and decrease profits for the year, just because you haven't sold the inventories.
I thought this was the point of using the opening stock + purchases - closing stock equation. Purchases and raw materials used seem roughly equivalent, so I still don't see why closing inventories should not be subtracted from the cost of sales.

 

Hi ZebuAlex,

You got something really wrong. The inventories aren't written off at all. Take a look at the Balance Sheet and you'll find Inventories standing at GBP 16m.

Your formula is right

Raw Materials Consumed = Opening Stock + Purchases - Closing Stock.

The cost of sales that we need to find is already given to us which is GBP 440m. Hence, there is no need to use that formula of yours.

Usually Trial Balances don't carry the closing stock figure. But we can make carry it by debiting the Stock A/c every time we purchase raw material and credit to Stock A/c. the amount raw material that is consumed during the preiod.

Hopefully, I didn't confuse.