Question

E. Gross Profit Method An inventory taken by Peace Hall Company the morning of November 01 after a large theft discloses $10,000 of goods on hand. The to goods on hand. The following additional data is available from the books: Inventory on hand, October 01 Purchases received from October 01 to 31 Sales (delivered to customers) October 01 to 31 $ 30,000 90,000 100,000 Past records indicate that the gross profit is 25% of sales. Estimate the inventory of goods on hand at the close of business on October 31 by the gross profit method and determine the amount of the theft loss.

Answer 1

Solution

Estimate of Inventory on hand on October 31 as per Gross Profit Method

Inventory on hand on October 1 (ie. Opening Inventory) = $ 30,000 (Cost Price)

Purchases from October 1 to October 31 = $ 90,000 (Cost price)

   So Total Goods available for sale = $ 120,000 (Cost Price)

Less:- Sales figure (at Cost Price) = $ 75,000 (Refer Note:-1)

So Closing Inventory (On October 31)   = $ 45,000 (Refer Note:-2)

Determination of amount of theft

Physical inventory on November 1 morning    = $ 10,000

Closing Inventory as per books (On October 31) = $ 45,000

    So the amount of theft = $ 35,000

Since the actual inventory (Physical inventory) is less than that of the inventory as per books, the difference between inventory as per books and actual inventory is considered as theft.  

Note:-

1) Calculation of Sales Figure at Cost Price

Since the sale figure includes a gross profit element of 25% on sales, the gross profit amount has to be eliminated from Sales figure to find out the "Sales Figure at Cost Price".

ie. Sales from October 1 to October 31 = $ 100,000

Less:- Gross profit figure (25% on Sales) = $ 25,000

So Sales Figure (at Cost Price)    = $ 75,000

2) Calculation of Closing Inventory

Closing Inventory is found out by deducting the Sales figure (at Cost Price) from the Total Goods

available for sale.

ie. Total goods available for sale = $ 120,000

Less:- Sales Figure (at Cost Price) = $ 75,000  

So Closing Inventory    = $ 45,000