Question

I.   Gross Profit Method

ABC Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of December.

	Cost		Retail
Inventory, Dec 1st.	$   250,000		$ 520,000
Purchases (gross)	500,000		980,000
Freight-in	25,000
Sales revenue			500,000
Sales returns			8,000
Purchase discounts	10,000

1. Compute the estimated inventory at cost on December 31^st, assuming that the gross profit is 20% of sales.

b. How does the answer differ if the gross profit is 25% of cost instead?

Answer 1

ANSWER:-

a.Compute the estimated inventory at cost on December 31^st, assuming that the gross profit is 20% of sales.

Inventory, May 1 [Beginning]		250,000
Add: Purchases (Gross)		500,000
Add: Freight in		25,000
Less: Purchase discounts		(10,000)
Goods Available for sale		765,000
Sales revenue	500,000
Less: Sales returns	(8000)
Net sales	492,000
Less:Gross Profit (492,000*20%)	(98,400)
Cost of goods sold		393,600
Ending inventory		371,400

b.How does the answer differ if the gross profit is 25% of cost instead?

Inventory, May 1 [Beginning]		250,000
Add: Purchases (Gross)		500,000
Add: Freight in		25,000
Less: Purchase discounts		(10,000)
Goods Available for sale		765,000
Sales revenue	500,000
Less: Sales returns	(8000)
Net sales	492,000
Less:Gross Profit (492,000*20%)	(98,400)
Cost of goods sold		393,600
Ending inventory		371,400

25% of cost = 20% of sales

Hence there is no difference in answer.