Kojo, a sole trader in electronics, maintains single-entry accounting records. For the yea… — JAMB UTME

Kojo, a sole trader in electronics, maintains single-entry accounting records. For the year ended 31st December 2025, the following information was extracted from his records:

- Inventory at 1st January 2025: $\text{₦}75,000$
- Total Purchases: $\text{₦}430,000$
- Carriage Inwards: $\text{₦}25,000$
- Returns Outwards: $\text{₦}10,000$
- Total Sales Revenue: $\text{₦}600,000$

Goods are sold at a uniform mark-up of $25\%$ on cost.

What is the estimated value of Kojo's closing inventory as at 31st December 2025?

A
₦15,000
₦40,000Answer
C
₦60,000
D
₦70,000

Answer

The estimated value of closing inventory as at 31st December 2025 is ₦40,000.

A mark-up of 25% on cost is equivalent to a 20% margin on sales revenue (

\frac{1}{4}

mark-up converts to

\frac{1}{5}

margin). Applying 20% to the total sales of ₦600,000 gives a gross profit of ₦120,000, leaving Cost of Goods Sold (COGS) at ₦480,000. Total Cost of Goods Available for Sale equals Opening Stock (₦75,000) plus Net Purchases (₦420,000) plus Carriage Inwards (₦25,000), giving ₦520,000. Subtracting COGS (₦480,000) from ₦520,000 yields the correct closing inventory of ₦40,000.

Step-by-Step Solution

Convert the mark-up percentage to profit margin on sales

\text{Margin} = \frac{\text{Mark-up}}{1 + \text{Mark-up}} = \frac{0.25}{1 + 0.25} = \frac{0.25}{1.25} = 0.20 \text{ (or } 20\%\text{)}

Mark-up is based on cost, whereas gross margin is expressed as a fraction of sales revenue.

Calculate Cost of Goods Sold (COGS)

\text{COGS} = \text{Sales} \times (1 - \text{Margin}) = \text{₦}600,000 \times (1 - 0.20) = \text{₦}480,000

Deducting the gross profit element from total sales revenue yields the cost of goods sold.

Compute Total Cost of Goods Available for Sale

\text{Goods Available} = \text{Opening Stock} + (\text{Purchases} - \text{Returns Outwards}) + \text{Carriage Inwards} = \text{₦}75,000 + (\text{₦}430,000 - \text{₦}10,000) + \text{₦}25,000 = \text{₦}520,000

Carriage inwards increases the cost of inventory acquired, while returns outwards reduce net purchases.

Determine Closing Inventory

\text{Closing Inventory} = \text{Goods Available for Sale} - \text{COGS} = \text{₦}520,000 - \text{₦}480,000 = \text{₦}40,000

Subtracting the cost of goods sold from total cost of goods available gives the remaining unsold inventory.

Key Concept

Relationship between Mark-up and Margin in Inventory Estimation

Estimated Time:2m 0s

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