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. NOT NET SALES

• 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

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