Estimating ending inventory using the gross margin method
Rich French, the owner of Rich’s Fishing Supplies, is surprised at the amount of actual inventory at the end of the year. He thought there should be more inventory on hand based on the amount of sales for the year. The following information is taken from the books of Rich’s Fishing Supplies:
Beginning inventory | $200,000 |
Purchases for the year | 400,000 |
Sales for the year | 600,000 |
Inventory at the snd of the year (based on actual count) | 100,000 |
Historically, Rich has made a 20 percent gross margin on his sales. Rich thinks there may be some problem with the inventory. Evaluate the situation based on the historical gross profit percentage.
Estimate the following:
a. Gross margin in dollars.
b. Cost of goods sold in dollars.
c. Estimated ending inventory.
d. Inventory shortage.
e. Give an explanation for the shortage.
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