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 $59,300. The following information for the month of November was available from company records:

Purchases	$	118,000
Freight-in		3,800
Sales		220,000
Sales returns		9,000
Purchases returns		8,000

In addition, the controller is aware of $12,000 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 30%.
2. Calculate the estimated inventory at the end of November, assuming a markup on cost of 100%.

Answer 1

1.

Beginning inventory (from records)		$59,300
Plus: Net purchases ($118,000 – 8,000)		110,000
Freight-in (from records)		3,800
Cost of goods available for sale		173,100
Less: Cost of goods sold:
Net sales ($220,000 – 9,000)	$211,000
Less: Estimated gross profit of 30%	(63,300)
Estimated cost of goods sold		(147,700)
Estimated cost of inventory before theft		25,400
Less: Stolen inventory		(12,000)
Estimated ending inventory		$13,400

2.

Beginning inventory (from records)		$59,300
Plus: Net purchases ($118,000 – 8,000)		110,000
Freight-in (from records)		3,800
Cost of goods available for sale		173,100
Less: Cost of goods sold:
Net sales ($220,000 – 9,000)	$211,000
Less: Estimated gross profit of 50%	(105,500)
Estimated cost of goods sold		(105,500)
Estimated cost of inventory before theft		67,600
Less: Stolen inventory		(12,000)
Estimated ending inventory		$55,600