Q33E - Horngren'S Financial And Managerial Accounting

Question

Clink Electric uses the periodic inventory system. Clink reported the following selected amounts at May 31, 2018:

Merchandise Inventory, June 1, 2017 \( 16,000                      Freight In \) 6,000

Merchandise Inventory, May 31, 2018 21,500             Net Sales Revenue 138,000

Purchases 81,000                                                                          Common Stock 32,000

Purchase Discounts 3,000                                              Retained Earnings 17,000

Purchase Returns and Allowances 6,600

Compute the following for Clink: 

a. Cost of goods sold. 

b. Gross profit.

Step-by-Step Solution

Answer

(a) The cost of goods sold of the company is $65,900.

(b) Gross profit of the company is $72,100.

Step 1: Meaning of Profit

In accounting, the term profit denotes excess revenues over the expenses. It is computed by taking the difference between revenues generated in one accounting period and expenses incurred to generate such revenues.

Step 2: Computation of cost of goods sold

Particulars	Amounts ($)
Opening inventory	16,000
Add: Net purchases (Working Note)	71,400
Less: Closing inventory	(21,500)
Cost of goods sold	$65,900

Working Note:

Computation of Net purchases:

$$\begin{gathered} \text{Net Purchases}=\text{Purchases}-\text{Purchase returns and allowances}-\text{Purchase discounts} \\ =\$81,000-\$6,600-\$3,000 \\ =\$71,400 \end{gathered}$$ 

Step 3: Computation of gross profit

$$\begin{gathered} \text{Gross Profit}=\text{Net Sales Revenue}-\text{Cost of Goods Sold} \\ =\$138,000-\$65,900 \\ =\$72,100 \end{gathered}$$