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 $58,500. The following information for the month of November was available from company records: 

Purchases.............................$110,000 

Freight-in.....................................3,000 

Sales..........................................180,000 

Sales returns................................5,000 

Purchases returns......................4,000 

In addition, the controller is aware of $8,000 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%. 

2. Calculate the estimated inventory at the end of November, assuming a markup on cost of 60%

Answer 1

1.

Net sales = Sales - Sales returns

                 =$180,000-$5,000

                 = $175,000

 

Gross profit ratio = 40%

 

Gross profit ratio = Net sales x 40%

                                = $175,000 x 40%

                                = $70,000

 

Cost of goods sold = Net sales - Gross profit

 

                                  = $175,000-$70,000
                                  = $105,000

 

Cost of goods sold = Beginning inventory, + Purchases - Purchase returns + Freight in - Inventory stolen - Ending inventory

 

$105,000 = $58,500 + $110,000 -  $4,000 + $3,000 -$8,000 - Ending inventory

Ending inventory= $54,500

 

The estimated inventory at the end of November = $54,500

 

2.

Gross profit = 60% on cost of goods sold

 

Let the cost of goods sold be $K

Gross profit = 0.6K

 

Gross profit = Net sales - Cost of goods sold

              0.6K = $175,000-K

              1.6K = $175,000

                    K = $109,375

 

Cost of goods sold = $109,375

 

Cost of goods sold = Beginning inventory, + Purchases - Purchase returns + Freight in - Inventory stolen - Ending inventory

 

$109,375 = $58,500 + $110,000-$4,000 + $3,000 - $8,000 - Ending inventory

Ending inventory = $50,125

 

The estimated inventory at the end of November = $50,125

The estimated inventory at the end of November = $50,125