Adjustments for inventory in preparing financial statement are for two reasons. One is for SOCI and other is for SFP.

We need to calculate cost of sales (COS) to work out the gross profit or profit generated from trading activities.

Cost of sales may not be equal to purchases made during the year due to opening inventory (inventory unsold in previous year) and closing inventory (inventory purchased but not sold) in current year.

To determine the cost of sales, we need to add opening inventory and deduct closing inventory from purchases.


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Exam Support:

You should not only rote learning this formula but also need to understand. In MCQs, you need to determine the missing item as balancing figure.

In addition, we need to determine at closing inventory balance to be recognized in SFP. This balance will be used as closing inventory value for determining cost of sales.

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