Accounting Mid-Term Practice

Harriet Limited has non-current assets of £425,000, current liabilities of £142,000 and equity of £391,000.
Harriet Limited has no non-current liabilities. Using the accounting equation, calculate the figure for current
assets.

Answer explanation

You have used the accounting equation to calculate the correct answer: non-current assets +
current assets – total liabilities = equity, so current assets = equity + current liabilities – non-current assets. (£108,000)

Patrick runs an engineering business. At the financial year end he has the following account balances:
prepayments: £7,500, trade payables: £52,600, inventory: £74,100, long term loan: £250,000, property, plant
and equipment: £325,400, trade receivables: £46,300, bank balance (asset): £22,000, taxation payable:
£10,700. Patrick’s total assets are:

Answer explanation

Feedback: You have correctly identified all the asset figures and added them up correctly to arrive at the right
answer for total assets. £7,500 (prepayments) + £74,100 (inventory) + £325,400 (property, plant and
equipment) + £46,300 (trade receivables) + £22,000 (bank balance: this is an asset not an overdraft which
would be a liability) = £475,300 (total assets).

A company has a certain amount in non-current assets and a different amount in equity. The company also has some current liabilities but no non-current liabilities. How would you use the accounting equation to determine the company's current assets?

Answer explanation

Re arranger this formula (Assets = Liabilities + Equity)

A retailer reports sales of £750,000, an opening inventory worth £80,000, and purchases totaling £400,000. If the gross profit made by the retailer is £350,000, what is the value of the closing inventory?

Answer explanation

The closing inventory is found by reconfiguring the COGS formula:

COGS = Opening Inventory + Purchases - Closing Inventory

The gross profit is the difference between Sales and COGS. Hence, the formula to find closing inventory is:

Closing Inventory = Opening Inventory + Purchases - (Sales - Gross Profit)

Insert the retailer's financial figures into the equation to calculate the closing inventory.

If a business records sales of £400,000, a closing inventory of £60,000, and purchases of £220,000, and the cost of goods sold is calculated to be £320,000, what was the opening inventory?

Answer explanation

To find the opening inventory, you can use the cost of goods sold (COGS) formula which is structured as follows:

COGS = Opening Inventory + Purchases - Closing Inventory

Since we want to find the Opening Inventory, we can rearrange the formula to solve for it:

Opening Inventory = COGS - Purchases + Closing Inventory

By using the given figures for COGS, purchases, and closing inventory, you would arrive at the value for the opening inventory.

A company's closing inventory is £45,000, its sales are £600,000, and the opening inventory is set at £35,000. If the cost of goods sold is found to be £250,000, what were the total purchases during the year?

Answer explanation

To determine the total purchases, the COGS equation is applicable:

COGS = Opening Inventory + Purchases - Closing Inventory

To isolate Purchases in the equation, you can rearrange it:

Purchases = COGS - Opening Inventory + Closing Inventory

Insert the known values for COGS, opening inventory, and closing inventory to calculate the total purchases.

Considering that a retailer has an opening inventory worth £70,000 and closing inventory of £50,000, with purchases throughout the year amounting to £280,000, what would the gross profit be if sales were £500,000?

Answer explanation

Gross Profit can be calculated by understanding that it is the difference between Sales and the COGS. First, calculate COGS with the formula:

COGS = Opening Inventory + Purchases - Closing Inventory

Once you have the COGS, the Gross Profit is calculated as:

Gross Profit = Sales - COGS

By calculating COGS with the given opening inventory, purchases, and closing inventory, you can then subtract it from sales to find the gross profit.

Hassan’s purchases for the financial year ended 30 September 2019 were £375,000. At 30 September 2018,
his closing inventory was £35,200 and his inventory at 30 September 2019 has been valued at £37,800.
Purchase returns during the year amounted to £5,730 and discounts allowed by suppliers totalled up to £1,875.
What is Hassan’s cost of sales for the year ended 30 September 2019?

Answer explanation

Feedback: Cost of sales = opening inventory + purchases – closing inventory – purchase returns – discounts
received. Hassan’s cost of sales is thus £35,200 (opening inventory at 1 October 2018 = closing inventory at
30 September 2018) + £375,000 (purchases for the financial year ended 30 September 2019) – £37,800
(closing inventory at 30 September 2019) – £5,730 (purchase returns for the year) – £1,875 (discounts allowed
by (= received from) suppliers) = £364,795.
QUESTION 9
Ismail’s sales for the financial year totalled up to £500,000. Opening inventory at the start of the financial year
was valued at £60,000 while closing inventory had a value of £75,000. Purchase returns during the financial
year amounted to a total of £5,000 and gross profit for the financial year was £220,000. What were Ismail’s
purchases during the financial year?
£300,000
Feedback: You have correctly rearranged the gross profit calculation to determine the purchases. As sales –
(opening inventory + purchases – closing inventory – purchase returns) = gross profit, then purchases = sales
– (gross profit + (opening inventory – closing inventory – purchase returns)). Purchases are thus £500,000
(sales) – (£220,000 (gross profit) + (£60,000 (opening inventory) – £75,000 (closing inventory) – £5,000
(purchase returns)) = £300,000. Using £300,000 as purchases produces a gross profit figure of £220,000
which = the £220,000 gross profit given in the question.
QUESTION 10
Fred runs a general store and has the following statement of profit or loss balances in his books at 31
December 2019: opening inventory: £25,000, wages: £45,000, sales: £275,000, purchases: £130,000, heat
and light: £15,000, closing inventory: £28,700. What is Fred’s gross profit for the year ended 31 December
2019?
£148,700
Feedback: You have correctly added opening inventory of £25,000 to purchases of £130,000 and deducted
closing inventory of £28,700 to determine the correct cost of sales figure of £126,300. Deducting this cost of
sales figure from sales of £275,000 has enabled you to calculate the correct gross profit figure of £148,700.

If a business has sales of £300,000, a closing inventory of £40,000, and gross profit of £150,000, what was the total amount of purchases for the year if the opening inventory was £20,000?

Closing Inventory = Opening Inventory + Purchases − (Sales−Gross Profit)