ITEM 7 CALCULATIONS New

Dear Ben,

Here's my work for the new Item 7 given.

ITEM 7 CALCULATIONS
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"The closing inventories are valued at cost of £72,000 on a first-in first-out basis.  This includes one batch of goods that cost £3,500 and has been damaged.  It can be sold for £1,750 if it is required at a cost of £250."

Opening inventory is £40,000, Purchases are £660,000, and closing inventory is £70,000 once damaged stock has been accounted at its net realisable value.
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So, our COGS formula is..

     COGS = OPENING INVENTORY + INVENTORY PURCHASES - END INVENTORY

and our expanded COGS formula is

     COGS = OPENING INVENTORY + (INVENTORY PURCHASES - PURCHASE DISCOUNTS - RETURNS OUT) - (END INVENTORY - INVENTORY ADJUSTMENTS)

No PURCHASE DISCOUNTS to remove from INVENTORY PURCHASES. So use 'nil'.  OK.
No RETURNS OUT to remove from INVENTORY PURCHASES. So use 'nil'.  OK.
NO MACHINERY DEPRECIATION to consider.

However, from what I can see, END INVENTORY must have the consideration for the breakages, and is quoted on the chart of accounts under Cost of Goods Sold, 5850 Inventory Adjustments thus...

Where INVENTORY ADJUSTMENTS amounts to £3,500 - (£1,750 - £250) = £2,000

From the info / Balance sheet given, we have the following numbers...

Item                                Found where?
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OPENING INVENTORY                = "Inventory (as at 1 October 2012)"   =   40
INVENTORY PURCHASES              = "Purchases"                          =  660
END INVENTORY                    = "Item 7..."                          =   70
INVENTORY ADJUSTMENTS            = "Item 7..."                          =    2

So, slotting in the numbers...

  COGS = OPENING INVENTORY + (INVENTORY PURCHASES) - (END INVENTORY - INVENTORY ADJUSTMENTS)

  COGS = 40 + (660) - (70 -2)

       = 632

I hope this helps.

Love,

Morgan ¯\(ツ)/¯