Calculate Purchases Using Gross Margin and Inventory Formula

Steps:

• Gross profit = 25% of sales = 0.25 × $200,000 =$50,000.
• Cost of goods sold (COGS) = Sales - Gross profit = $200,000 -$50,000 = $150,000.
• Purchases = COGS + Closing inventory - Opening inventory = $150,000 +$75,000 - $50,000 =$175,000.

Why C is correct:

• Matches the standard formula for purchases in the trading account: Purchases = COGS + Closing Inventory - Opening Inventory.

Why the others are wrong:

• A: Subtracts gross profit from opening inventory, ignoring sales and proper COGS.
• B: Equals COGS only, forgetting to adjust for inventory changes.
• D: Adds closing inventory to sales without subtracting gross profit or opening inventory.

Final answer: C