Ted sells belts and accessories to fashion stores around the country, buying in most of his goods
Question:
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 six months in advance. Even Ted, however, makes mistakes.
In his accounting year to 31 December 20X5, 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 stock remains unsold at the year-end. Ted's sales are £599 790 for the year. Total opening stock (which included no pink items, and which was valued at cost) was £49 071, and total closing stock 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 that remain in stock.
Draw up a trading account that values closing stock at the lower of cost or net realisable value. Calculate Ted’s gross profit margin and compare it to the gross profit margin that would have been achieved if the whole of closing stock were valued at cost.
Step by Step Answer:
Financial Accounting For Non Specialists
ISBN: 9781844802050
2nd Edition
Authors: Catherine Gowthorpe