Question

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.

Answer 1

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

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