Question

In: Accounting

Martinez Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below...

Martinez 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 $ 175,600
Purchases (gross) 617,400
Freight-in 31,700
Sales revenue 973,200
Sales returns 68,100
Purchase discounts 12,900

Part 1

Correct answer iconYour answer is correct.

Compute the estimated inventory at May 31, assuming that the gross profit is 20% of net sales.

The estimated inventory at May 31

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

$87,720 (I got correct, but not part 2)

Part 2

Incorrect answer iconYour answer is incorrect.

Compute the estimated inventory at May 31, assuming that the gross profit is 20% 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

Solutions

Expert Solution

1 Compute the estimated inventory at May 31, assuming that the gross profit is 20% of net sales.
Cost of Goods sold is computed as follows:-
Sales revenue $ 973,200
Less Sales returns $ 68,100
Net Sales $ 905,100
Less: Gross Profit (20% of net sales) $ 181,020
Cost of Goods sold $ 724,080
Estimated ending inventory of Finished Goods (May 31) is computed as follows:-
Beginning inventory of Finished Goods $ 175,600
Add: Net Purchases
Purchases (gross) $   617,400
Add:Freight-in $     31,700
Less:Purchase discounts $     12,900 $ 636,200
[42] Cost of Goods available for sale $ 811,800
Less: Cost of Goods sold $ 724,080
Estimated ending inventory of Finished Goods (May 31) $ 87,720
2 Compute the estimated inventory at May 31, assuming that the gross profit is 20% of cost.
Gross Profit on cost 20.00%
Gross Profit on sales (20/(100+20)*100) 16.67%
Cost of Goods sold is computed as follows:-
Sales revenue $ 973,200
Less Sales returns $ 68,100
Net Sales $ 905,100
Less: Gross Profit (16.67% of net sales) $ 150,880
Cost of Goods sold $ 754,220
Estimated ending inventory of Finished Goods (May 31) is computed as follows:-
Beginning inventory of Finished Goods $ 175,600
Add: Net Purchases
Purchases (gross) $   617,400
Add:Freight-in $     31,700
Less:Purchase discounts $     12,900 $ 636,200
[42] Cost of Goods available for sale $ 811,800
Less: Cost of Goods sold $ 754,220
Estimated ending inventory of Finished Goods (May 31) $ 57,580

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