Crystal Arts
a) Opening stock is the price of a firm's stocks at the beginning of a trading period. The value is equal to that of the closing stock in the previous trading period. Clear definition is required for maximum marks.
b) Profit and Loss Account for Crystal Arts (this month)
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LIFO ($)
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FIFO ($)
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Sales
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15,000
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15,000
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Opening stock
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5,000
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5,000
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10 @ $500 = $5,000
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Plus Purchases
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6,000
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6,000
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10 @ $600 = $6,000
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Less Closing stock
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2,500*
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3,000#
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* LIFO: 5 @ $500 = $2,500
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COGS
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8,500
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8,000
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# FIFO: 5 @ $600 = $3,000
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Gross profit
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6,500
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7,000
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Less Operating expenses
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1,000
|
1,000
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Operating profit before tax
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5,500
|
6,000
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Tax
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1,650
|
1,800
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@ 30% tax
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Net profit after tax
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3,850
|
4,200
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Note that an extra 9.09% tax is paid if Crystal Arts uses the FIFO method of stock control. Given that chandeliers and the lower tax liabilities are non-perishable stocks; the firm may well prefer to use the LIFO method.