Question

You are auditing the records of Lin Corp. The company took a physical inventory under your observation. However, the valuations have not been completed. The records of the company provide the following data: sales, $400,000 (gross); returned sales, $17,500 (returned to stock); purchases (gross), $250,000; beginning inventory, $160,000; freight in, $8,000; and purchase returns and allowances, $7,000. The gross margin last period was 25% of net sales; you anticipate that it will average 30% for the year under audit.

 

Required:

Estimate the cost of the ending inventory and the cost of sales using the gross margin method. Show all calculations.

Answer 1

 

Cost of goods available for sale:

      Beginning inventory....................................................................                         $160,000

      Purchases.....................................................................................  $250,000

      Freight-in.....................................................................................          8,000

                                                                                                                 258,000

    Less: Purchase returns and allowances.............................     7,000       251,000

 Cost of goods available for sale..................................................              411,000

 

Deduct estimated cost of goods sold:

      Sales revenue...............................................................................   400,000

      Less: Returns..............................................................................       17,500

            Net sales.................................................................................   382,500

Less: Estimated gross margin ($382,500 × 30%)............. 114,750        267,750

Estimated cost of ending inventory....................................                    $143,250