Question

Crane, Inc. estimates the cost of its physical inventory at March 31 for use in an interim financial statement. The rate of markup on cost is 25%. The following account balances are available: Inventory, March 1 $538000 Purchases 418000 Purchase returns 8000 Sales during March 714000 The estimate of the cost of inventory at March 31 would be

Answer 1

Answer:

The estimated Inventory is $376,000.00, which is equal to the difference between cost of goods available for sale and cost of goods sold.

Explanation:

The cost of goods available for sale is made of Beginning Inventory $538,000 and Net Purchases $410,000 (418,000 Purchase - 8,000 Purchase Returns).

The cost of goods sold is 100% of Sales of $714,000, using a markup on cost of 25%.  This implies that Sales represent 100+25%, = 125%.

Cost of goods sold is therefore $714,000/125 x 100, which is equal to $571,200.

A summary of Trading Account is attached to illustrate the above workings.

Download xlsx

Answer 2

Answer:

$376,800

Explanation:

Mark up is the profit on cost i.e it is the amount added to cost to get the selling price of a commodity. As such, were the markup is known and the sales, the cost of goods sold can be determined as

Mark up = (sales - cost of sales)/cost of sales

If the cost of sales is U

0.25 = ($714,000 - U)/U

1.25U = $714,000

U = $571,200

The movement in the balance of inventory at the start and end of a period is as a result of sales and purchases. While sales reduces the balance in inventory, purchases increases the balance. This may be expressed mathematically as

Opening balance + purchases less returns - cost of goods sold = closing balance

$538,000 + $418,000 - $8,000 - $571,200 = Closing balance

Closing balance which is the cost of inventory at March 31 would be

= $376,800