A trader's inventory was destroyed and closing inventory must be estimated. Sales for the year were £150,000, and the trader always sells at a mark-up of 25% on cost. Opening inventory was £18,000 and purchases were £121,500. What was the closing inventory?

Correct answer: B) £19,500

Explanation

A mark-up of 25% on cost means sales are 125% of cost, so cost of sales = £150,000 x 100/125 = £120,000. Closing inventory = opening inventory + purchases - cost of sales = £18,000 + £121,500 - £120,000 = £19,500. Treating 25% as a margin on sales would give cost of sales of £112,500 and the wrong inventory figure.