A business has incomplete records. Sales for the year were $120,000. The business operates with a uniform gross profit margin of 20%. Opening inventory was $15,000 and closing inventory was $18,000. What were the purchases for the year? (Enter numbers only)

How to approach this question

Use the margin to find Cost of Sales. Then use the Cost of Sales formula (Opening Inv + Purchases - Closing Inv) to solve for Purchases.

Full Answer

Gross profit margin is 20% of sales. Therefore, Cost of Sales (COS) is 80% of sales. COS = 80% * $120,000 = $96,000. The formula for COS is: Opening Inventory + Purchases - Closing Inventory = COS. $15,000 + Purchases - $18,000 = $96,000. Purchases - $3,000 = $96,000. Purchases = $99,000.

Common mistakes

Confusing margin (percentage of sales) with mark-up (percentage of cost).

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