Question

Royal Gorge Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of October was $60,100. The following information for the month of November was available from company records:

Purchases	$	126,000
Freight-in		4,600
Sales		260,000
Sales returns		7,500
Purchases returns		6,500

In addition, the controller is aware of $7,500 of inventory that was stolen during November from one of the company's warehouses.

Required:
1. Calculate the estimated inventory at the end of November, assuming a gross profit ratio of 40%.

	$	$
Beginning inventory		60100
Plus: Net purchases(126000-6500)		119500
Freight-in		4600
Cost of goods available for sale		184200
Less: Cost of goods sold:
Net sales(260000-7500)	252500
Less: Estimated gross profit (40%*252500)	101000
Estimated cost of goods sold		151500
Estimated cost of inventory before theft		32700
Less: Stolen inventory		7500
Estimated ending inventory		25200

2. Calculate the estimated inventory at the end of November, assuming a markup on cost of 100%.

	$	$
Beginning inventory		60100
Plus: Net purchases		119500
Freight-in		4600
Cost of goods available for sale		184200
Less: Cost of goods sold:
Net sales	252500
Less: Estimated gross profit (50% * 252500)	126250
Estimated cost of goods sold		126250
Estimated cost of inventory before theft		57950
Less: Stolen inventory		7500
Estimated ending inventory		50450

Answer 1

Gross profit = difference between sales and cost of sales

Gross profit percentage =[( net sales – cost of sales)/net sales] *100

Calculate the estimated inventory at the end of November, assuming a gross profit ratio of 40%.

• Required 1

	$ $ Beginning inventory 60100 Plus: Net purchases(126000-6500) 119500 Freight-in 4600 Cost of goods available for sale 184200 Less: Cost of goods sold: Net sales(260000-7500)   252500 Less: Estimated gross profit (40%*252500) 101000 Estimated cost of goods sold 151500 Estimated cost of inventory before theft 32700 Less: Stolen inventory 7500 Estimated ending inventory 25200

2. Calculate the estimated inventory at the end of November, assuming a markup on the cost of 100%.

gross profit percentage of the cost = 100%

gross profit percentage of sales = gross profit percent of cost / (1+gross profit percent of the cost)

gross profit percent of sales = 100%/(1+100%) = 1/(2) = 50%

	$   $ Beginning inventory 60100 Plus: Net purchases 119500 Freight-in 4600 Cost of goods available for sale 184200 Less: Cost of goods sold: Net sales 252500 Less: Estimated gross profit (50% * 252500) 126250 Estimated cost of goods sold 126250 Estimated cost of inventory before theft 57950 Less: Stolen inventory 7500 Estimated ending inventory 50450