Chapter 9: 14E (page 479)

Mark Price 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 $ 160,000 Purchases (gross) 640,000 Freight-in 30,000 Sales revenue 1,000,000 Sales returns 70,000 Purchase discounts 12,000 Instructions (a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales. (b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.

Short Answer

Expert verified

(a) The estimated inventory on May 31 equals $167,000.

(b) The estimated inventory on May 31 equals $102,644.

Step by step solution

Calculation of net purchases

Net purchases is calculated as follows:

$\begin{array}{rcl} Net purchases & = & Purchases + Freight - in - Purchase discounts \\ = & $ 640, 000 + $ 30, 000 - $ 12, 000 \\ = & $ 658, 000 \end{array}$

Calculation of cost of goods sold in (a)

Cost of goods sold is calculated as follows:

$\begin{array}{rcl} Cost of goods sold & = & (Sales revenue - Sales return) \times (1 - Gross profit percentage) \\ = & ($ 1, 000, 000 - $ 70, 000) \times (1 - 30 %) \\ = & $ 651, 000 \end{array}$

Calculation of estimated inventory at May 31

(a) Estimated inventory on May 31 is calculated as follows:

$\begin{array}{rcl} Estimated inventory at May 31 & = & Inventory at May 1 + Net purchases - Cost of goods sold \\ = & $ 160, 000 + $ 658, 000 - $ 651, 000 \\ = & $ 167, 000 \end{array}$

Calculation of gross profit percentage on sales

Gross profit percentage on sales is calculated as follows:

$\begin{array}{rcl} Gross profit percentage on sales & = & \frac{Percentage markup on cost}{100 % + Percentage markup on cost} \\ = & \frac{30 %}{100 % + 30 %} \\ = & 23.08 % \end{array}$

Calculation of cost of goods sold in (b)

Cost of goods sold is calculated as follows:

$\begin{array}{rcl} Cost of goods sold & = & (Sales revenue - Sales returns) \times (1 - Gross profit percentage) \\ = & ($ 1, 000, 000 - $ 70, 000) \times (1 - 23.08 %) \\ = & $ 715, 356 \end{array}$

Calculation of estimated inventory at May 31

(b) Estimated inventory at May 31 is calculated as follows:

$\begin{array}{rcl} Estimated inventory at May 31 & = & Inventory at May 1 + Net purchases - Cost of goods sold \\ = & $ 160, 000 + $ 658, 000 - $ 715, 356 \\ = & $ 102, 644 \end{array}$

Thus, ending inventory on May 31, in part (a) equals $167,000, and in part (b) equals $102,644.

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Short Answer

Step by step solution

Calculation of net purchases

Calculation of cost of goods sold in (a)

Calculation of estimated inventory at May 31

Calculation of gross profit percentage on sales

Calculation of cost of goods sold in (b)

Calculation of estimated inventory at May 31

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Influences On Business

Organizational Communication

Managerial Economics

Introduction to Business

Change Management

Business Operations

Study anywhere. Anytime. Across all devices.