4.7 Ted sells belts and accessories to fashion stores around the country, buying in most of his goods from China. Long experience in the business has developed his judgement in purchasing;

he needs to be able to judge fashion trends at least 6 months in advance. Even Ted, however, makes mistakes.

In his accounting year to 31 December 2012, Ted buys in a range of coordinating accessories in hot pink. By the middle of the year Ted realises that he has misjudged the market.

This year’s colours are sludgy browns and greens and there is no demand for pink.

In total Ted’s purchases for the year are £379 322. Of these, £21 900 related to the pink items and £17 750 of the inventory remains unsold at the year-end. Ted’s revenue is

£599 790 for the year. Total opening inventory (which included no pink items, and which was valued at cost) was £49 071, and total closing inventory is £62 222 including the unsold £17 750 of pink items. Ted has had an offer from a discounter of £6000 for all the pink items which remain in inventory.

Draw up a trading account which values closing inventory at the lower of cost and net realisable value. Calculate Ted’s gross profit margin and compare it to the gross profit margin which would have been achieved if the whole of closing inventory were valued at cost.