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 $59,500. The following information for the month of November was available from company records:

Purchases	$	120,000
Freight-in		4,000
Sales		230,000
Sales returns		10,000
Purchases returns		9,000

In addition, the controller is aware of $13,000 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 40%.
2. Calculate the estimated inventory at the end of November, assuming a markup on cost of 100%

Answer 1

1.

	Amount ($)
Beginning inventory	$59,500
Add: Purchase	120,000
Freight In	4,000
Less: Purchase return	9,000
Goods available for sale	174500
Less: Stolen during the year	13,000
	161500
Less: cost of goods sold	132,000
Estimated ending inventory	$29,500

Sales	$230,000
Less: sales return	10000
Net sales	220,000
Less: gross profit @40%	88000
Cost of goods sold	$132,000

2.

	Amount ($)
Beginning inventory	$59,500
Add: Purchase	120,000
Freight In	4,000
Less: Purchase return	9,000
Goods available for sale	174500
Less: Stolen during the year	13,000
	161500
Less: cost of goods sold	110,000
Estimated ending inventory	$51,500

Sales	$230,000
Less: sales return	10000
Net sales	220,000
Less: markup on cost @100%	110000
Cost of goods sold	$110,000