The following information is available for Figment Ltd.for last year: The cost of goods sold is equal to 300% of selling expenses.What is the cost of goods available for sale?
A)Cannot be determined from information given.
B)$490,000
C)$590,000
D)$788,000

Question

The following information is available for Figment Ltd.for last year:  The cost of goods sold is equal to 300% of selling expenses.What is the cost of goods available for sale?
A)Cannot be determined from information given. 
B)$490,000 
C)$590,000 
D)$788,000

Quizplus · Accepted Answer

We need to find out the cost of goods available for sale. However, the information given does not directly give us this value. Therefore, we need to use some logic to derive this value. We know that cost of goods sold is equal to 300% of selling expenses. We can represent this information using the following equation:
Cost of goods sold = 3 x Selling expenses
We also know that the cost of goods sold is equal to the sum of beginning inventory and purchases minus ending inventory. We can represent this information using the following equation:
Cost of goods sold = Beginning inventory + Purchases - Ending inventory
We can substitute the first equation into the second equation and get the following:
3 x Selling expenses = Beginning inventory + Purchases - Ending inventory
We are still missing some values to solve for the cost of goods available for sale, but we can use some additional information to get there. We know that the gross profit for the year was $450,000, which means that the gross margin was 45% (gross margin = gross profit / net sales). We can use this information to solve for the cost of goods sold as a percentage of net sales:
Gross margin = Net sales - Cost of goods sold / Net sales
0.45 = 1 - Cost of goods sold / Net sales
Cost of goods sold / Net sales = 0.55
We can use this information to solve for the cost of goods sold:
Cost of goods sold = 0.55 x Net sales
We can substitute this equation into the first equation we derived:
3 x Selling expenses = Beginning inventory + Purchases - Ending inventory
3 x Selling expenses = Beginning inventory + Purchases - (Cost of goods sold - Beginning inventory)
3 x Selling expenses = Beginning inventory + Purchases - 0.45 x Net sales + Beginning inventory
2 x Beginning inventory + Purchases = 3 x Selling expenses + 0.45 x Net sales
We do not know the value of net sales, but we can use another piece of information to solve for it. We know that the cost of goods sold was $295,000. We can use this information to solve for net sales:
Cost of goods sold = 0.55 x Net sales
295000 = 0.55 x Net sales
Net sales = 536364.36
Now we can substitute this value back into the equation we derived earlier:
2 x Beginning inventory + Purchases = 3 x Selling expenses + 0.45 x Net sales
2 x Beginning inventory + Purchases = 3 x Selling expenses + 0.45 x 536364.36
2 x Beginning inventory + Purchases = 3 x Selling expenses + 241363.96
We still do not know the value of purchases, but we can use one more piece of information to solve for it. We know that the ending inventory was $70,000 and that the inventory turnover ratio (ITR) was 6 times. We can use the ITR to calculate the cost of goods sold and then use that value to solve for purchases:
ITR = Cost of goods sold / ((Beginning inventory + Ending inventory) / 2)
6 = Cost of goods sold / ((Beginning inventory + 70000) / 2)
Cost of goods sold = 3 x ((Beginning inventory + 70000) / 2)
295000 = 3 x ((Beginning inventory + 70000) / 2)
Beginning inventory = 80000
We can now substitute the values we have into the equation we derived earlier to solve for purchases:
2 x Beginning inventory + Purchases = 3 x Selling expenses + 241363.96
2 x 80000 + Purchases = 3 x Selling expenses + 241363.96
Purchases = 3 x Selling expenses - 163636.04
We do not know the value of selling expenses, but we can use one final piece of information to solve for it. We know that the net income for the year was $230,000, and we know that net income is equal to gross profit minus operating expenses. We can represent this information using the following equation:
Net income = Gross profit - Operating expenses
230000 = 450000 - Operating expenses
Operating expenses = 220000
We can use the gross margin to solve for the cost of goods sold as a percentage of net sales again:
Gross margin = Net sales - Cost of goods sold / Net sales
0.45 = 536364.36 - Cost of goods sold / 536364.36
Cost of goods sold = 236000
Now we can solve for purchases:
Purchases = 3 x Selling expenses - 163636.04
Purchases = 3 x 220000 / 4 - 163636.04
Purchases = 590,909.09
Finally, we can solve for the cost of goods available for sale:
Cost of goods available for sale = Beginning inventory + Purchases
Cost of goods available for sale = 80000 + 590909.09
Cost of goods available for sale = $670,909.09
Therefore, the best choice is (C) $590,000.

The Following Information Is Available for Figment Ltd