Question

Sandhill Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May. Inventory, May 1 Purchases (gross) Freight-in Sales revenue Sales returns Purchase discounts $ 156,000 663,700 31,500 1,061,800 72,100 13,100 (a) X Your answer is incorrect. Compute the estimated inventory at May 31, assuming that the gross profit is 25% of net sales. The estimated inventory at May 31 $ 155450

Answer 1

Net Sales

= Sales revenue – Sales returns

= $1,061,800 - $72,100

= $989,700

Gross Profit

= Net Sales x Gross Profit percentage

= $989,700 x 25%

= $247,425

Now, Net Sales – Cost of goods sold = Gross Profit

So, Cost of goods sold = Net Sales – Gross Profit

But, Cost of goods sold

= Opening inventory + Net Purchases ( Gross Purchases – Purchase discounts ) + Direct expenses ( Freight – In and other similar expenses ) – Closing Inventory

So, equating the above equations we get,

Net Sales – Gross Profit = Opening inventory + Net Purchases ( Gross Purchases – Purchase discounts ) + Direct expenses ( Freight – In and other similar expenses ) – Closing Inventory

So, $989,700 - $247,425 = $156,000 + $663,700 - $13,100 + $31,500 – Closing Inventory

So, Closing Inventory = $156,000 + $663,700 - $13,100 + $31,500 +$247,425 - $989,700

= $95,825

So, the closing inventory is $95,825