Estimating ending inventory: gross margin method
Mae’s Market Place wishes to produce quarterly financial statements, but it takes a physical count of inventory only at year end. The following historical data were taken from the 2011 and 2012 accounting records:
| 2011 | 2012 |
Net sales | $60,000 | $70,000 |
Cost of goods sold | 31,000 | 36,500 |
At the end of the first quarter of 2013, Mae’s ledger had the following account balances:
Sales | $56,500 |
Purchases | 41,000 |
Beginning inventory 1/1/2013 | 12,500 |
Ending inventory 3/31/2013 | 15,000 |
Based on purchases and sales, Mae thinks her inventory is low.
Required
Using the information provided, estimate the following for the first quarter of 2013:
a. Cost of goods sold. (Use the average cost of goods sold percentage.)
b. Ending inventory at March 31.
c. What could explain the difference between actual and estimated inventory?
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