- 6 -6
prepared by Faw, signed by Mrs. Smith, and dated November 10,
1995, petitioners responded:
Inventory was counted at retail (market price). After
all inventory was counted and totaled, guns were marked
down 15% to cost (by multiplying retail price by 85%)
and other inventory was marked down 40% to cost (by
multiplying retail price by 60%). This method of
deriving the year-end inventory valuation has been used
by me since the inception of the business,
approximately 30 years ago.
After reading the letter, Agent Brown determined that petitioners
had a 15-percent gross profit on guns and a 40-percent gross
profit on other goods. Mrs. Smith intended, however, for the
percentages stated in her letter to reflect markup, rather than
gross profit percentages. A markup percentage is profit divided
by cost while a gross profit percentage is profit divided by
sales. For example, an item that costs $100 and sells for $118
has an 18-percent markup (i.e., $18 profit divided by $100 cost)
and a 15-percent gross profit (i.e., $18 profit divided by $118
sales). Accordingly, a 15-percent gross profit is equal to an
18-percent markup, and a 40-percent gross profit is equal to a
67-percent markup.
With the information from petitioners and third parties,
Agent Brown adjusted petitioners' cost of goods sold and
reconstructed their gross receipts as follows:
1990 1991
original amended adjusted original amended adjusted
Gross Receipts $916,099 $881,353 $1,001,017 $999,482 $992,372 $1,177,850
Cost of Goods Sold 667,606 711,496 622,769 728,371 797,224 729,929
Beginning Inventory 131,250 131,250 131,250 131,250 88,014 131,250
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Next
Last modified: May 25, 2011