Question

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

Buffalo 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 \$ 156,000
Purchases (gross) 663,700
Freight-in 31,500
Sales revenue 1,061,800
Sales returns 72,100
Purchase discounts 13,100

Compute the estimated inventory at May 31, assuming that the gross profit is 25% of net sales.

Compute the estimated inventory at May 31, assuming that the gross profit is 25% of cost.

Net sales = Sales revenue - Sales returns

= 1,061,800-72,100

= \$989,700

Gross profit = 25% of sales

= 989,700 x 25%

= \$247,425

Cost of goods sold = Net Sales - Gross profit

= 989,700-247,425

= \$742,275

Cost of good sold = Beginning inventory + Purchases - Purchase discounts + Freight in - Ending inventory

742,275 = 156,000+663,700-13,100+31,500-Ending inventory

Ending inventory = \$95,825

Gross profit = 25% on cost

Let the cost be \$Y

Gross profit = Y x 25%

= 0.25Y

Net Sales = Cost of good sold + Gross profit

989,700 = Y + 0.25Y

989,700 = 1.25Y

Y = 791,760

Hence cost of good sold = \$791,760

Cost of good sold = Beginning inventory + Purchases - Purchase discounts + Freight in - Ending inventory

791,760 = 156,000+663,700-13,100+31,500-Ending inventory

Ending inventory = \$46,340

Kindly give a positive rating if you are satisfied with this solution and please ask if you have any query.

Thanks

#### Earn Coins

Coins can be redeemed for fabulous gifts.