Question

Royal Gorge Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of October was $59,500. The following information for the month of November was available from company records:

Purchases	$	120,000
Freight-in		4,000
Sales		230,000
Sales returns		15,000
Purchases returns		9,000

In addition, the controller is aware of $13,000 of inventory that was stolen during November from one of the company's warehouses.

Required:
1. Calculate the estimated inventory at the end of November, assuming a gross profit ratio of 40%.
2. Calculate the estimated inventory at the end of November, assuming a markup on cost of 60%.

Answer 1

Answer 1 Calculate the estimated inventory at the end of November, assuming a gross profit ratio of 40% $59,500 $111,000 $4,000 $174,500 Beginning Inventory Add: Net purchases ($120,000 - $9,000) Freight-in Cost of Goods Available for Sale Less: Cost of goods sold Net Sales ($230,000 - $15,000) Less: Estimated Gross Profit ($215,000 x 40%) Estimated Cost of Goods Sold Estimated Cost of Inventory before Theft Less: Stolen inventory Estimated Ending Inventory $215,000 ($86,000) $129,000 $45,500 $13,000 $32,500

2 Calculation of estimated inventory at the end of November, assuming a markup on cost of 60%. Beginning Inventory $59,500 Add: Net purchases ($120,000 - $9,000) $111,000 Freight-in $4,000 Cost of Goods Available for Sale $174,500 Less: Cost of goods sold Net Sales ($230,000 - $15,000) $215,000 Less: Estimated Gross Profit ($215,000 x 37.5%) ($80,625) Estimated Cost of Goods Sold $134,375 Estimated Cost of Inventory before Theft $40,125 Less: Stolen inventory $13,000 Estimated Ending Inventory $27,125 Explanations Gross profit as a % of sales = Gross Profit as a % of Cost/(1+Gross Profit as a % of Cost) = 0.60/(1+0.60) = 0.375 or 37.50%