(Gross Profit Method) Astaire Company uses the gross profit method to estimate i

Question

(Gross Profit Method)

Astaire 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 1,000,000
Sales returns 70,000
Purchase discounts 12,000


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



Inventory $


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



Inventory $

Explanation / Answer

(a) Inventory, May 1 (at cost) 160000 Purchases (gross) (at cost) 640000 Purchase discounts (12000) Freight-in 30000 Goods available (at cost) 818000 Sales (at selling price) 1000000 Sales returns (at selling price) (70000) Net Sales ( at selling price) 930000 Less gross profit (25% of 930000) 232500 Sales (at cost) (697500) Approximate Inventory, May 31 (at cost) 120500 (b) Inventory, May 1 (at cost) 160000 Purchases (gross) (at cost) 640000 Purchase discounts (12000) Freight-in 30000 Goods available (at cost) 818000 Sales (at selling price) 1000000 Sales returns (at selling price) (70000) Net Sales ( at selling price) 930000 Less gross profit (20%* of 930000) 168000 Sales (at cost) (744000) Approximate Inventory, May 31 (at cost) 74000 *25%/(100%+25%) = 20% of sales

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