CMA Study Group

COGS Query

  • 1.  COGS Query

    Posted 22 days ago
    Hello - can you please help me in understanding the correct answer d? I am unclear if the correct inventory balance is $130,000 lower, how does the COGS be more:

    Q. A company's finished goods inventory was miscounted, and the correct balance is $130,000 lower. 
    Management is concerned about correcting the error because bonuses are only earned if the 
    minimum gross profit margin is 45%. Selected financial information is shown below. 

    Revenues $1,000,000 
    Cost of goods sold 500,000 
    Salaries 57,000 
    Accounts receivable 22,000 
    Cash 43,000 

    With the corrected inventory, will the bonus target be met? 

    a. Yes, the gross profit margin will increase. 
    b. No, the working capital will decrease. 
    c. Yes, the gross profit margin will not change. 
    d. No, the cost of goods sold will increase. (Correct - Correcting the inventory error will cause cost of goods sold to increase.)

    Thank you,
    db



  • 2.  RE: COGS Query

    Posted 22 days ago
    The formula to calculate the Cost of Goods Sold = Beginning Inventory + Purchases during the period - Closing stock

    So, if the inventory (Closing Stock) is undervalued, it will automatically increase the COSG.

    Thanks

    ------------------------------
    Ashvin Kulkarni
    Accountant
    Pune
    India
    ------------------------------



  • 3.  RE: COGS Query

    Posted 22 days ago
    Thank for your reply but still I am not convinced with the response, please see below what I can see that COGS will reduce:

       Actual (Shown $130K less)  Should be (Added $130K in ending bal.)
     Begin. Invent.             500            500
     Purchase             120            120
     Ending Invent.             320            420
     COGS             300            200

    Thank you,
    db

    ------------------------------
    Dhiraj Bhojwani
    Supervisor
    Bangalore
    India
    ------------------------------



  • 4.  RE: COGS Query

    Posted 22 days ago
    I am sorry, the inventory is not undervalued but is actually Overvalued.

    The first sentence "A company's finished goods inventory was miscounted, and the correct balance is $130,000 lower" says it all.

    You should not add the 130K but it need to be deducted from closing inventory to get the correct amount.


    ------------------------------
    Ashvin Kulkarni
    Accountant
    Pune
    India
    ------------------------------



  • 5.  RE: COGS Query

    Posted 22 days ago
    Yes, I think this helps or we can add $130K to beginning balance, that will also help. But, overall, the question seems simple but it isn't. Thank you.

    ------------------------------
    Dhiraj Bhojwani
    Supervisor
    Bangalore
    India
    ------------------------------



  • 6.  RE: COGS Query

    Posted 22 days ago
    It was a tricky one.

    Most welcome.

    ------------------------------
    Ashvin Kulkarni
    Accountant
    Pune
    India
    ------------------------------