Question

On January 1, 2016, Company X had an inventory balance of $200,000. During the year, Company X had net purchases of $1,000,000 and net sales of $900,000. Historically, Company X’s gross profit ratio has been 40%. Using the gross profit method, what is Company X’s estimated ending inventory balance on December 31, 2016?

Answer 1

Gross profit ratio = 40%

Gross profit = 900,000 x 40%

Gross profit = 360,000

If gross profit ratio is 40% then the cost of goods sold will be 60%.

Cost of goods sold = 900,000 x 60%

Cost of goods sold = 540,000

Cost of goods sold = beginning inventory + net purchases - ending inventory

540,000 = 200,000 + 1,000,000 - ending inventory

540,000 = 1,200,000 - ending inventory.

Ending inventory = 1,200,000 - 540,000

Ending inventory = $ 660,000

Hence, $ 660,000 is the correct answer.

SUMMARY:

$ 660,000 is the correct answer.