Exercise 9-12 Mark Price Company uses the gross profit method to estimate invent

Question

Exercise 9-12

Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May.

(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. (Round percentage of sales to 2 decimal places, e.g. 78.74% and final answer to 0 decimal places, e.g. 6,225.)

Explanation / Answer

(a)

Net sales = Sales revenue – Sales returns = $1,007,700 - $78,200 = $929,500

Gross Profit = 30% of sales = $929,500 * 0.30 = $278,850

Cost of goods sold = Sales – Gross profit = $929,500 - $278,850 = $650,650

Cost of goods sold = Beginning inventory + Net purchases + Freight in – Ending Inventory

$650,650 = $166,500 + ($655,700 - $12,530) + $30,700 – Ending inventory

Ending Inventory = $840,370 - $650,650 = $189,720

(b)

Gross profit = (Net purchases + Freight in) * 0.30 = {($655,700 - $12,530) + $30,700} * 0.30 = $202,161

Cost of goods sold = Net sales – Gross profit = $929,500 - $202,161 = $727,339

Cost of goods sold = Beginning inventory + Net purchases + Freight in – Ending Inventory

$727,339 = $166,500 + ($655,700 - $12,530) + $30,700 – Ending inventory

Ending Inventory = $840,370 - $727,339 = $113,031

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