Question

E 9-11 Gross profit method QL09-2 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 $58,500. The following information for the month of November was available from company records: $110,000 Purchases Freight-in Sales 3,000 180,000 Sales returns 5,000 4,000 Purchases returns In addition, the controller is aware of $8,000 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 ESTIMATE INVENTORY AT THE END OF NOVEMBER IF GROSS PROFIT RATIO OF 40% :

COST OF BEGINNING INVENTORY		58500
NET PURCHASE (110000-4000)		106000
FREIGHT ON PURCHASE		3000
COST OF GOODS AVAILABLE FOR SALE		167500
LESS ; COST OF GOODS SOLD
SALES (180000-5000)	175000
LESS : GROSS PROFIT (40%)	(70000)
ESTIMATED COST OF GOODS SOLD		(105000)
ESTIMATED COST OF ENDING INVENTORY		62500
INVENTORY STOLEN		(8000)
ESTIMATED COST OF ENDING INVENTORY		54500

2. CALCULATE ESTIMATED INVENTORY ASSUMING A MARKUP COST OF 60%

BEGINNING INVENTORY		58500
NET PURCHASE (110000-4000)		106000
FREIGHT IN		3000
COST OF GOODS AVAILABE FOR SALE		167500
SALE	175000
ESTIMATED GROSS PROFIT	-65625
ESTIMATED COST OF GOODS SOLD		109375
ESTIMATED COST OF INVENTORY BEFORE THEFT		58125
GOODS STOLEN		(8000)
ESTIMATED ENDING INVENTORY		50125

Markup on 60% of cost   =   60% / (100% + 60%) * 100 =   37.50% of sales
Estimated gross profit = Net sales * 37.50%
$175,000 * 37.50%
=65625

*Estimated cost of inventory before theft   = Cost of goods available for sale - Estimated cost of goods sold