Quillmark Stationers supplies offices and schools. These balances were taken from the books at 31 December 2025, once the inventory had been counted. Item $...
Question 1 Report
Quillmark Stationers supplies offices and schools. These balances were taken from the books at 31 December 2025, once the inventory had been counted.
| Item | $ |
|---|---|
| Revenue | 186,000 |
| Sales returns | 2,400 |
| Inventory at 1 January 2025 | 14,600 |
| Purchases | 118,000 |
| Purchases returns | 3,100 |
| Carriage inwards | 1,900 |
| Carriage outwards | 2,700 |
| Wages | 21,000 |
| Rent | 12,000 |
| General expenses | 5,400 |
| Inventory at 31 December 2025 | 16,200 |
| Wages still owing | 800 |
| Rent covering January 2026 | 1,500 |
- Work out the cost of sales (4)
- Prepare the income statement for the year ended 31 December 2025 (9)
- The owner wants a gross margin above 35%. State whether it was reached, giving your figure (2)
Answer Details
Two adjustments have to be applied before the expenses are listed: the wages still owing are added to the wages paid, because that work has been done, and the rent covering January 2026 is deducted from the rent paid, because that month has not yet been occupied.
(a) Cost of sales [4]
| Cost of sales | $ |
|---|---|
| Inventory at 1 January 2025 | 14,600 |
| Add purchases | 118,000 |
| Less purchases returns | (3,100) |
| Add carriage inwards | 1,900 |
| Cost of goods available for sale | 131,400 |
| Less inventory at 31 December 2025 | (16,200) |
| Cost of sales | 115,200 |
(b) Income statement for the year ended 31 December 2025 [9]
| Quillmark Stationers | $ | $ |
|---|---|---|
| Revenue | 186,000 | |
| Less sales returns | (2,400) | 183,600 |
| Less cost of sales | (115,200) | |
| Gross profit | 68,400 | |
| Less expenses | ||
| Carriage outwards | 2,700 | |
| Wages (21,000 + 800 owing) | 21,800 | |
| Rent (12,000 - 1,500 prepaid) | 10,500 | |
| General expenses | 5,400 | (40,400) |
| Profit for the year | 28,000 |
Sales returns are deducted from revenue rather than shown as an expense, because those goods came back and were never sold. Carriage outwards is the cost of delivering goods to customers and belongs after gross profit, unlike carriage inwards which forms part of cost of sales. The $800 of wages owing is an other payable at the year end and the $1,500 of rent prepaid is an other receivable.
(c) Gross margin [2]
Gross margin = gross profit / revenue x 100 = $68,400 / $183,600 x 100 = 37.25%
This is above the 35% the owner wanted, so the target was reached.
Exam reminder: the gross margin is always calculated on net revenue after sales returns, not on the $186,000 headline figure. Using $186,000 would give 36.77% and understate the margin actually achieved.
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