Exercise 9-14 Riverbed Company uses the gross profit method to estimate inventor

Question

Exercise 9-14 Riverbed 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 Purchases (gross) Freight-in Sales revenue Sales returns Purchase discounts 174,600 607,000 29,300 983,300 67,700 12,700 Compute the estimated inventory at May 31, assuming that the gross profit is 20% of net sales. The estimated inventory at May 3:1 Compute the estimated inventory at May 31, assuming that the gross profit is 20% of cost (Round percentage of sales to 2 decimal places eg 78.74% and finala decimal places, e.g. 6,225.) The estimated inventory at May 31 Click if you would like to Show Work for this question: Open Show Work search

Explanation / Answer

1)

Net Sales

= Sales - Sales Returns

=$983,300 - $67,700

= $915,600

Gross Profit

= Net Sales x Gross Profit Percentage

= $915,600 x 20%

= $183,120

So, Cost of goods sold

= Net Sales - Gross Profit

= $915,600 - $183,120

= $732,480

Closing Inventory

= Opening Inventory + Purchases - Purchase discount + Freight Inwards - Cost of Goods Sold

= $174,600 + $607,000 - $12,700 + $29,300 - $732,480

= $65,720

2)

If Gross profit is 20% of cost, let cost be $1

So, Gross profit = Cost x 20%

= $1 x 20%

= $0.20

So, Net Sales = Cost + Gross Profit

= $1 + $0.20

= $1.20

So, $915,600 = $1.20

So, $1 that is Cost = $915,600 / $1.20

= $763,000

So, as per formula for closing Inventory as discussed above,

Closing Inventory

= Opening Inventory + Net purchases + Freight - Cost of goods sold

= $174,600 + $607,000 - $12,700 + $29,300 - $763,000

= $35,200

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