Assume that an entity acquired 250 items of inventory at a cost of £20 each and sold 150 of the items for £25 each when the replacement cost was £22. Assume that the replacement cost of the remaining 50 units at year end was £24. Under Edwards and Bell the operating profit is: Assume that an entity acquired 250 items of inventory at a cost of £20 each and sold 150 of the items for £25 each when the replacement cost was £22. Assume that the replacement cost of the remaining 50 units at year end was £24. Under Edwards and Bell the operating profit is: 450 750 200 300
Question
Assume that an entity acquired 250 items of inventory at a cost of £20 each and sold 150 of the items for £25 each when the replacement cost was £22. Assume that the replacement cost of the remaining 50 units at year end was £24. Under Edwards and Bell the operating profit is:
Assume that an entity acquired 250 items of inventory at a cost of £20 each and sold 150 of the items for £25 each when the replacement cost was £22. Assume that the replacement cost of the remaining 50 units at year end was £24. Under Edwards and Bell the operating profit is:
450
750
200
300
Solution
The Edwards and Bell approach to accounting focuses on the current cost of replacing inventory.
First, let's calculate the cost of goods sold (COGS). The entity sold 150 items, which were originally purchased for £20 each. So, the COGS is 150 items * £20/item = £3000.
Next, let's calculate the sales revenue. The entity sold 150 items for £25 each. So, the sales revenue is 150 items * £25/item = £3750.
The gross profit is then calculated as sales revenue - COGS = £3750 - £3000 = £750.
However, under the Edwards and Bell approach, we also need to account for the change in the replacement cost of the inventory. The replacement cost increased from £22 to £24 for the remaining 100 items. So, the increase in replacement cost is 100 items * (£24/item - £22/item) = £200.
Therefore, the operating profit under the Edwards and Bell approach is the gross profit - increase in replacement cost = £750 - £200 = £550.
So, none of the provided options are correct. The operating profit under the Edwards and Bell approach should be £550.
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