Question

Aunt Josie’s Toy Company has been in operation for several years. At the beginning of 2008, there was $315,700 in beginning inventory. The following information about its inventory is available:

			Ending Inventory
Year	Purchase	Sales	Cost	Net Realizable Value
2008	$1,890,000	$2,670,000	$290,000	$380,000
2009	1,750,000	2,240,000	350,000	340,000
2010	1,910,000	2,850,000	260,000	320,000
2011	2,040,000	2,930,000	320,000	370,000

a. Calculate the gross margin for each year, valuing the ending inventory at acquisition cost

(Hint: use the following relationship: Beginning inventory + Purchase – Ending inventory = Cost of Goods Sold).                                          

b. Calculate the gross margin for each year, valuing the ending inventory at the lower of cost and market value.

Answer 1

a) Calculate gross margin :

	Beginning inventory	Purchase	Ending inventory	Cost of goods sold	Sales	Gross margin
2008	315700	1890000	290000	1915700	2670000	754300
2009	290000	1750000	350000	1690000	2240000	550000
2010	350000	1910000	260000	2000000	2850000	850000
2011	260000	2040000	320000	1980000	2930000	950000

b) Calculate gross margin :

	Beginning inventory	Purchase	Ending inventory	Cost of goods sold	Sales	Gross margin
2008	315700	1890000	290000	1915700	2670000	754300
2009	290000	1750000	340000	1700000	2240000	540000
2010	340000	1910000	260000	1990000	2850000	860000
2011	260000	2040000	320000	1980000	2930000	950000