Question

Beginning inventory, january 1: $4,000 net sales: $80,000 net purchases: $78,000 the company's gross margin ratio is 25%. using the gross profit method, the estimated ending inventory value would be:

Answer 1

Answer:

$22,000

Explanation:

cost of goods sold = beginning inventory + purchases - ending inventory

• beginning inventory = $4,000
• net purchases = $78,000
• COGS = ?
• ending inventory = ?

COGS = 75% of total sales = 75% x $80,000 = $60,000

$60,000 = $4,000 + $78,000 - ending inventory

ending inventory = $82,000 - $60,000 = $22,000

Answer 2

Answer:

$26,000

Explanation:

Beginning inventory, january 1: $4,000

net sales: $80,000

net purchases: $78,000

If the company's gross margin ratio is 25%. using the gross profit method, the estimated ending inventory value would be derived from the formula -

1. Beginning inventory + Purchases - ending inventory = Cost of Goods Sold.

and

2. Sales - Cost of Goods Sold = Gross profit.

Therefore beginning from 2. If the gross profit is 25%, then the Cost of Sales is 75% of Sales value which is 0.7 x $80,000 = $56,000

Therefore going to formula 1 above, and using 56,000 as the value of Cost of goods sold:

Beginning inventory + Purchases - Ending inventory = Cost of Goods Sold. which implies that 4,000+78,000 - ending inventory = $56,000

Therefore ending inventory = 78,000 + 4000 - 56,000 = $26,000