Jim’s Jeans makes stylish denim products for senior citizens. Jim’s Jeans begins the year with $20,000 in inventory. Jim purchases his inventory from a supplier in Europe and during the year he purchased $85,000 in goods. With the success of his Granny Glam line, Jim was quite happy with $150,000 in sales for the year, and he sees a 50% gross profit on the selling price. What was the balance of his inventory account at year end?
Explanation
Answer -D - The balance of the inventory account at year end is $30,000. The answer is found by plugging numbers into the Cost of Goods Sold formula:
opening inventory
+ additions during the year
goods available for sale
− year-end inventory
cost of goods sold
The unknown in the problem is the year-end inventory. The other numbers can be plugged in. First, the COGS needs to be determined. This is found in the statement of $150,000 in sales with a 50% gross profit. Thus, $150,000 x .5 = $75,000 in gross profit. Subtract gross profit from sales to get the COGS: 150,000 − 75,000 = 75,000 COGS
Using the formula:
20,000 (opening inventory)
+ 85,000 (additions during the year) =
105,000 (goods available for sale)
− Year End Inventory =
75,000
Therefore, year-end inventory is $30,000.
Key Takeaway: The cost of goods sold formula often has figures that will require further calculations to obtain. The COGS formula is:
Opening inventory
+ Additions during the year
Goods available for sale
− Year-end inventory
Cost of goods sold.
