Question

# Sheridan Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below...

Sheridan Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May.

Inventory, May 1 \$ 159,500
Purchases (gross) 593,300
Freight-in 32,900
Sales revenue 974,400
Sales returns 75,900
Purchase discounts 10,800

Compute the estimated inventory at May 31, assuming that the gross profit is 35% of cost.

Steps in the gross profit method to calculate closing inventory is given below:

1. Calculate the cost of goods available for sale as the sum of the cost of beginning inventory and cost of net purchases.
2. Determine the gross profit ratio.
3. Multiply sales made during the period by gross profit ratio to obtain estimated cost of goods sold.
4. Calculate the cost of ending inventory as the difference of cost of goods available for sale and estimated cost of goods sold.

Example

 Cost of Beginning Inventory \$159500 Net Purchases at Cost =593300 - 10800 =582500 Freight Cost on Purchase 32900 Cost of Goods Available for Sale 774900 Less: Estimated Cost of Goods Sold: Sales \$974400 - 75900 = 898500 Less: Estimated Gross Profit 35% ?314475 Estimated Cost of Goods Sold 584025 Estimated Cost of Ending Inventory \$190875

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