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 $60,200. The following information for the month of November was available from company records: Purchases $ 127,000 Freight-in 4,700 Sales 265,000 Sales returns 22,000 Purchases returns 7,000 In addition, the controller is aware of $8,000 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%. 2. Calculate the estimated inventory at the end of November, assuming a markup on cost of 60%.

Answer 1

Answer:

1. $31,100

2. $104,000

Explanation:

1. Cost of goods available for sale:

= Cost of beginning inventory + Net purchase + Freight on purchase

= $60,200 + ($127,000 - $7,000) + $4,700

= $184,900

Estimated cost of goods sold:

= Sales - Gross profit

= ($265,000 - $22,000) - [40% × ($265,000 - $22,000)]

= $243,000 - $97,200

= $145,800

Estimated cost of ending inventory:

= Cost of goods available for sale - Estimated cost of goods sold - Inventory stolen

= $184,900 - $145,800 - $8,000

= $31,100

2. Cost of goods sold = Sales × (60/200)

                                     = $243,000 × (60/200)

                                     = $72,900

Estimated cost of ending inventory:

= Cost of goods available for sale - Estimated cost of goods sold - Inventory stolen

= $184,900 - $72,900 - $8,000

= $104,000