- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 6. Analysis of Inventories
- Subject 1. Inventory Valuation
CFA Practice Question
McDonald Golf Supplies sells merchandise inventory at a gross profit of 45% of sales price. In September 2015, a fire destroyed the entire inventory. From the accounting records, beginning inventory was $248,000 and purchases up to the time of the fire were $674,000. Sales up to the time of the fire were $1,290,000. What was the value of the inventory destroyed?
B. $341,500
C. $414,900
A. $212,500
B. $341,500
C. $414,900
Correct Answer: A
Ending Inventory = ($248,000 + $674,000) - [$1,290,000 x (1 - 0.45)] = $212,500
User Contributed Comments 6
| User | Comment |
|---|---|
| stranger | Sales = Gross Profit(.45 of sales) + COGS(.55 of sales) COGS=.55*Sales=.55*1,290,000=709,500 Inventory Destroyed = Inventory in stock = Ending inventory = B.Inv + Purchases - COGS = 248000 + 674000 - 709500 = 212500 |
| danlan | COGS > purchase, so the ending inventory < beginning inventory, and A is the only possible answer. |
| Khadria | 45% of sales price means the cost of inventory is (1 - 0.45) x Sales price |
| rgat | EI = BI + P - COGS BI = 248K; P = 674K; COGS = ? Gross Profit = Sales - COGS Sales = 1,29 mil; GProfitMar = 45% Gross Profit Margin = (Sales - COGS) / Sales .45 = (1,29 mil - COGS) / 1,29 mil COGS = 709,500 EI = 248K +674K - 709,500 = 212,500 |
| cfairs | Use the two formula to arrive at the answer A: BegInv + Purchases = COGS + EndInv Gross Profit = Sales - COGS |
| 8thlegend | Simple formula Cogs = Beg inv + purchases - end inv. |