Inventory adjustment for sale or return basis Steps:

• Calculate total cost of goods sent: selling price $5000 at 25$5000 / 1.25 = $4000.
• Cost of returned goods: selling price $1000 means cost =$1000 / 1.25 = $800.
• When sent, inventory decreases by $4000 (goods out of possession).
• Returned goods increase inventory by $800; net decrease =$4000 - $800 =$3200.

Why C is correct:

• In sale or return accounting, inventory decreases by cost of goods sent and increases by cost of returned goods, per standard inventory valuation rules.

Why the others are wrong:

• A: Ignores cost basis; $1000 is selling price of returned goods, not net inventory change.
• B: Misapplies markup; $500 is not derived from costs involved.
• D: Uses full selling price of remainder ($4000) instead of cost ($3200).

Final answer: C