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 $59,400. The following information for the month of November was available from company records:

Purchases	$	119,000
Freight-in		3,900
Sales		225,000
Sales returns		14,000
Purchases returns		8,500

In addition, the controller is aware of $12,500 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

1	Estimated Cost of ending Inventory	$             34,700
2	Estimated Cost of ending Inventory	$             29,425
	Workings:
1	Cost of beginning Inventory	$             59,400
Add:	Net Purchase	$         1,10,500
Add:	Freight on purchase	$               3,900
	Cost of goods available for sale	$         1,73,800
Less:	Cost of goods sold	$       -1,26,600
Less:	Inventory stolen	$           -12,500
	Estimated Cost of ending Inventory	$             34,700
	Net Sales	$         2,11,000
Less:	Gross Profit (@40%)	$             84,400
	Cost of goods sold	$         1,26,600
2	Cost of beginning Inventory	$             59,400
Add:	Net Purchase	$         1,10,500
Add:	Freight on purchase	$               3,900
	Cost of goods available for sale	$         1,73,800
Less:	Cost of goods sold	$       -1,31,875
Less:	Inventory stolen	$           -12,500
	Estimated Cost of ending Inventory	$             29,425
	Net Sales	$         2,11,000
	Cost of goods sold ($211000 / 1.6)	$         1,31,875