Page 72 - Accountancy_F5

Statement of computing inventory as at 31 December 2023
st
Details TZS TZS

Opening inventory 393,600
Add: Purchases 4,096,000
4,489,600
FOR ONLINE READING ONLY
Less: Returns outwards 51,200
Cost of goods available for sale 4,438,400
LANGUAGE EDITING
Less: Cost of sales 5,120,000
Sales 45,600
LANGUAGE EDITING
Less: Returns inwards 5,074,400

Net sales 1,268,600
Less: Gross profit (25% × 5,074,400) (3,805,800)
Closing inventory 632,600

Note that in both alternatives, allowances to cash customers were ignored in computation
of net sales. The discount was allowed to customers to induce them to pay promptly,
hence no effect on gross profit.

Retail method
The retail method is typically employed by businesses that handle large volumes of
inventory with relatively low unit prices. All items are generally priced at retail values.
Supermarkets, for instance, commonly utilise this method. The steps involved in using
this method are as follows:

(a) Determine the cost of goods available for sale in retail price and cost price
(b) Calculate the cost to retail ratio, by dividing the cost of goods available for sale at
retail price by the cost available at cost price.
Cost of goods available for sale at cost price
Cost of retail ratio = # 100
Cost of goods available for sale at retail price

(c) Calculate the value of closing inventory at retail price by deducting sales from the
cost of goods available for sale at retail price.
(d) Closing inventory at retail price = Cost of goods available for sale at retail price
– Sales value
(e) Obtain the closing inventory at cost by taking step (b) × step (c)
(f) Closing inventory = Cost to retail ratio × Closing inventory at retail prices.

Student’s Book Form Five
59

23/06/2024 17:35
ACCOUNTANCY_DUMMY_23 JUNE.indd 59
ACCOUNTANCY_DUMMY_23 JUNE.indd 59 23/06/2024 17:35