Question

E9-14 (L04) (Gross Profit Method) Mark Price 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 $ 160,000
Purchases (gross) 640,000
Freight-in 30,000
Sales revenue 1,000,000
Sales returns 70,000
Purchase discounts 12,000
Instructions
(a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales.
(b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.

Answer 1

Ans. 1	Beginning inventory (at cost)		$160,000
	Purchase		$640,000
	Purchase discounts		-$12,000
	Freight - in		$30,000
	Goods available (at cost)		$818,000
	Sales (at selling price)	$1,000,000
	Sales returns (at selling price)	-$70,000
	Net sales (at selling price)	$930,000
	Less: Gross profit ($930,000 * 30%)	-$279,000
	Sales (at cost)		$651,000
	Ending inventory		$167,000
Ans. 2	Beginning inventory (at cost)		$160,000
	Purchase		$640,000
	Purchase discounts		-$12,000
	Freight - in		$30,000
	Goods available (at cost)		$818,000
	Sales (at selling price)	$1,000,000
	Sales returns (at selling price)	-$70,000
	Net sales (at selling price)	$930,000
	Less: Gross profit ($930,000 * 23.08%)	-$214,644
	Sales (at cost)		$715,356
	Ending inventory		$102,644
	Markup on 30% of cost   =   30% / (100% + 30%) * 100 =   23.08% of sales
	Ending inventory = Goods available at cost - Sales at cost