Question

Henderson 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 July was $123,500.

The following information for the month of August was available from company records:

Purchases $ 221,000

Freight-in 5,400

Sales 352,000

Sales returns 9,200

Purchases returns 4,500

In addition, the controller is aware of $12,000 of inventory that was stolen during August from one of the company’s warehouses.

Required:
1.figure the estimated inventory at the end of August, assuming a gross profit ratio of 25%.
2. figure the estimated inventory at the end of August, assuming a markup on cost of 25%.

Answer 1

Solution 1:

Net sales = Sales - Sales return = $352,000 - $9,200 = $342,800

Gross profit on net sales = $342,800*25% = $85,700

Cost of goods sold = $342,800 - $85,700 = $257,100

Estimated ending inventory = Beginning inventory + Net Purchases - Cost of goods sold - Inventory stolen

= $123,500 + ($221,000 + $5,400 - $4,500) - $257,100 - $12,000 = $76,300

Solution 2:

Net sales = Sales - Sales return = $352,000 - $9,200 = $342,800

Markup on cost = 25%

Cost of goods sold = $342,800 / 125% = $274,240

Estimated ending inventory = Beginning inventory + Net Purchases - Cost of goods sold - Inventory stolen

= $123,500 + ($221,000 + $5,400 - $4,500) - $274,240 - $12,000 = $59,160