The following information is available for Torino Corp. for its most recent year:

Net sales... $3,600,000
Freight-in... 90,000
Purchase discounts... 50,000
Ending inventory... 240,000

The gross margin is 40 percent of net sales. What is the cost of goods available for sale?
a.$1,680,000
b$1,920,000
c.$2,400,000
d.$2,440,000

I will be very thank ful whoever helps me

The answer is (a) = $ 1,680,000

SEE WORKINGS :-

Net sales 3,600,000

Purchases 1,640,000
Freight-in 90,000
Purchases Discount -50,000

cost of goods 1,680,000
closing stock 240,000

margin 1,440,000
margin % 40

Thank u for answering

Cost of goods available for sale equals cost of goods sold + ending inventory.
Cost of goods sold is Sales - Gross margin
$3,600,000 - ($3,600,000 x 40%) = $2,160,000
Now cost of goods available for sale will be $2,160,000 + 240,000 = $2,400,000.

The figure for purchases is not given in the problem and it seems to a balancing figure. You have added margin figure to closing stock.

rehmanvohra,

I would emphasise this fact:-

The gross margin is 40 percent of net sales.

Please have another look at your workings.

Thank you Rolcam. I find that net sales are $3,600,000 and 40% of that is $1,440,000. However your own working shows gross margin at $1,440,000 being 40% of net sales.

Can you please comment, on the calculation of cost of goods available for sale?

As per my workings the Cost of Goods is as follows:-

Purchases 1,640,000
Freight-in 90,000
Purchases Discount -50,000

Cost of goods 1,680,000

This is equivalent to 60% of Net Sales.
The Freight-in and the discount figures are given.
So, the balance must be Purchases.

This is the original question posted by Ashakoirala

The following information is available for Torino Corp. for its most recent year:

Net sales... $3,60 0,000
Freight-in... 90,000
Purchase discounts... 50,000
Ending inventory... 240,000

The gross margin is 40 percent of net sales. What is the cost of goods available for sale?

The question has given the purchases but no beginning inventory. The amount of $1,680,000 is net purchases whereas the member wants to know the cost of goods available for sale

Please note that $1,680,000 is not 60% of net sales of $3,600,000. Please recheck your calculations you will find that it is $1,440,000 ($3,600,000 x 40%)

The answer to the original question is (a).

I had established this at the first place.

I am sorry I do not agree with your answer. I do not know why you are doing this because all your suggestions for making your answer acceptable as correct and wrong.

You have emphatically said that $1.680,000 is cost of goods. It is rather the cost of net purchases. You seem to have worked it out as follows:

Gross Margin $3,600,000 x 40% = $1,440,000
Ending inventory $240,000
Total $1,680,000

I fail to understand since when the ending inventory is added to gross margin to determine cost of goods available for sale.

I have referred to many books on accounting which suggest that cost of goods sold section is as follows:

Beginning inventory
+ Net Purchases
=Cost of goods available for sale
- Ending Inventory
= Cost of goods sold

Just for a change, prepare a statement

$ $
Sales 3,600,000
Cost of goods sold
Beginning Inventory
Net Purchases 1,680,000
Cost of goods available for sale (W2) 2,400,000
Ending Inventory (240,000)
Cost of goods sold (W1) 2,160,000
Gross Profit 1,440,000

1. You can see that the cost of goods sold can be calculated by deducting gross profit from sale. That gives us $3,600,000 – 1,440,000 = $2,160,000.

2. By the same token, Cost of goods sold is calculated by reducing inventory from the cost of goods available for sale. That means that if we add ending inventory to cost of goods sold, we get cost of goods available for sale

3. Cost of purchases is not given in the question and is based on your workings

I hope you will reconsider your answer.

DEBITS

Beginning Inventory
Net Purchases
Gross Profit

The question asked for an answer.
I gave the answer .
There are no alternatives.
The Beginning Inventory is a RED HERRING.

Yes, the question did ask for an answer. But you did not understand the question and that resulted in an incorrect answer.

Beginning inventory does not have any part to play and it seems you are now assuming too many things that are not required to be assumed.

rehmanvohra is absolutely correct. I calculated it without looking at any posts and got exactly what he did, the same way he did. (We all screw up, but if someone else gets a different answer, I always look at what they did to see if I screwed up. I was a bit surprised over what I saw here.)

There isn't any way with the given information to even get net cost of purchases. The freight-in and discounts are worthless information to the problem. Where is the 1,640,000 even coming from?? That appears to me to be a totally fabricated number.

It's the freight and discounts which are the red herrings!

See attached. A bit messy, but it's all there. Please also note that 60% of 3,600,000 is 2,160,000, which is the other way of finding it. Your answer isn't 60%.

(And that's not even mentioning that we're not supposed to just be giving answers away to begin with.)

Attached Files

AMHD Ash.xls (16.5 KB, 231 views)