Question

Pharoah 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		$ 156,500
Purchases (gross)		628,400
Freight-in		31,900
Sales revenue		1,029,400
Sales returns		74,600
Purchase discounts		10,800

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

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Compute the estimated inventory at May 31, assuming that the gross profit is 25% of cost. (Round percentage of sales to 2 decimal places, e.g. 78.74% and final answer to 0 decimal places, e.g. 6,225.)

The estimated inventory at May 31

$enter the dollar amount of the estimated inventory at May 31

Answer 1

Net purchases = Purchases - Purchase discount + Freight in

= 628,400-10,800+31,900

= $649,500

Net Sales = Sales revenue - Sales returns

= 1,029,400-74,600

= $954,800

Gross profit = 25% of net sales

= 954,800 x 25%

= $238,700

Cost of goods sold = Net Sales - Gross profit

= 954,800-238,700

= $716,100

Cost of goods sold = Beginning inventory + Net purchases - Ending inventory

716,100 = 156,500+649,500-Ending inventory

Ending inventory = 806,000-716,100

= $89,900

The estimated inventory at May 31

$89,900

Gross profit = 25% of cost

Let cost of goods sold be Z

Gross profit = Z x 25%

= 0.25Z

Gross profit = Net sales - Cost of goods sold

0.25Z = 954,800- Z

1.25Z = 954,800

Z = $763,840

Hence cost of goods sold = $763,840

Cost of goods sold = Beginning inventory + Net purchases - Ending inventory

763,840 = 156,500+ 649,500- Ending inventory

Ending inventory = 806,000-763,840

= $42,160

The estimated inventory at May 31

$42,160

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