How is closing inventory treated in the financial statements of a sole trader?
Correct answer: C. It is deducted in calculating cost of sales and shown as a current asset
- A. It is added to purchases and shown as a liability
- B. It is deducted from sales and shown as an expense
- C. It is deducted in calculating cost of sales and shown as a current asset
- D. It is added to expenses and shown as non-current asset
Explanation
Closing inventory reduces the cost of goods sold because it has not yet been sold. It is also shown as a current asset in the statement of financial position.
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About Financial Statements of Sole Traders
Sole trader statements calculate revenue, cost of sales, gross profit, operating expenses and net profit, then present assets, liabilities and owner’s capital in the statement of financial position. Adjustments for closing inventory, accruals, prepayments, depreciation, bad debts, drawings and additional capital connect the two statements.
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More Financial Statements of Sole Traders questions
A sole trader has net sales of Rs. 250,000, opening inventory of Rs. 40,000, purchases of Rs. 140,000, carriage inward of Rs. 10,000 and closing inventory of Rs. 30,000. What is the gross profit?
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