Question

Q.XYZ Co. prepares monthly income statements. Inventory is counted only at year end; thus, month-end inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 25%. The following information relates to the month of May.

Accounts receivable, May 1                                                                            21,000

Accounts receivable, May 31                                                                          27,000

Collections of accounts during May                                                                90,000

Inventory, May 1                                                                                             45,000

Purchases during May                                                                                     58,000

Instructions

Calculate the estimated cost of the inventory on May 31.

Answer 1

Calculation of on account sales during the month of May
Collections of accounts during May	$90,000.00
Add : Accounts receivable, May 31	$27,000.00
Less : Accounts receivable, May 1	$21,000.00
On account sales during May	$96,000.00
Calculation of cost of goods sold during May
Cost of goods sold = Sales on account / (1+Mark up on cost)
Cost of goods sold = $96000 / 1.25 = $76,800
Calculation of estimated cost of Inventory on May 31
Inventory May 1	$45,000.00
Add : Purchases during May	$58,000.00
Less : Cost of goods sold in May	$76,800.00
Estimated Cost of Inventory on May 31	$26,200.00