Question

Ayayai 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 $ 156,000 Purchases (gross) 576,100 Freight-in 29,300 Sales revenue 998,400 Sales returns 72,100 Purchase discounts 11,900

(a) Your answer is incorrect. Try again. Compute the estimated inventory at May 31, assuming that the gross profit is 25% of net sales. The estimated inventory at May 31 $enter the dollar amount of the estimated inventory at May 31

Answer 1

Answer)

Calculation of value of ending inventory at May 31

Gross Profit = Net Sales – Cost of Goods sold

Gross Profit = Net Sales – (Beginning inventory + Net purchases + freight inwards – Ending inventory)

$ 231,575 = $ 926,300 – ($ 156,000 + $ 564,200 + $ 29,300 – Ending inventory)

$ 231,575 = $ 926,300 - $ 749,500 + Ending inventory

$ 231,575 = $ 176,800+ Ending inventory

Ending inventory = $ 231,575 - $ 176,800

                                = $ 54,775

Therefore the value of ending inventory at May 31 is $ 54,775.

Working Note:

Calculation of Net Sales:

Net Sales = Sales revenue – Sales returns

                  = $ 998,400 - $ $ 72,100

                  = $ 926,300

Calculation of Gross profit:

Gross profit = Net Sales X 25%

                       = $ 926,300 X 25%

                       = $ 231,575

Calculation of Net Purchases:

Net purchases = Gross purchases – purchase discounts

                           = $ 576,100 - $ $ 11,900

                          = $ 564,200.