Question

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. NOT NET SALES

Answer 1

• Gross Profit = 35% of cost of goods sold

Hence, total net sales = 135% of cost of Goods Sold [Cost + 35% = 135%]

• Total Net Sales = Sales Revenue – Sales return
  = $974,400 – $ 75,900 = $ 898,500
• Cost of Goods Sold = $ 898,500 / 135% = $ 665,556
• Cost of Goods Sold = Beginning Inventory + (Purchases – Purchase discount) + Freight In – Ending Inventory.

$ 665,556 = $ 159,500 + ($ 593,300 – $ 10,800) + $ 32,900 – Ending Inventory
Ending Inventory = 159500 + (593300 – 10800) + 32900 – 665556
Ending Inventory = 159500 + 582500 + 32900 – 665556
Ending Inventory = $ 109,344

• Answer: Estimated Inventory at May 31 = $ 109,344