Royal Gorge Company uses the gross profit method to estimate ending inventory an

Question

Royal Gorge Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of October was $59,900. The following information for the month of November was available from company records: Purchases $ 124,000 Freight-in 4,400 Sales 250,000 Sales returns 6,500 Purchases returns 5,500 In addition, the controller is aware of $6,500 of inventory that was stolen during November from one of the company’s warehouses. Required: 1. Calculate the estimated inventory at the end of November, assuming a gross profit ratio of 40% Calculate the estimated inventory at the end of November, assuming a markup on cost of 100%.

Explanation / Answer

Assuming Gross profit ratio:

Cost of goods sold = (Sales-Sales return) * (1-40%)

= (250000-6500)*(1-40%)

= $146100

Cost of goods sold = Opening inventory + Net purchases+Direct expenses-Abnormal loss-clsoing inventory

146100 = 59900 + (124000-5500) + 4400 - 6500 - Closing inventory

Closing inventory = $30200

Cost of goods sold = Net sales * 100/200

= $121750

so,

121750 = 59900 + (124000-5500) + 4400 - 6500 - Closing inventory

Closing inventory =$54550

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