Mark Price Company uses the gross profit method to estimate inventory for monthl

Question

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

Inventory, May 1............................................$160,000

Purchases (gross).............................................640,000

Freight-in..........................................................30,000

Sales revenue..................................................1,000,000

Sales returns.....................................................70,000

Purchase discounts.............................................12,000

*Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.

Explanation / Answer

Step 1: Calculate Goods Available at Cost

The value of goods available at cost is calculated with the use of following table:

_____________

Step 2: Calculate Sales at Cost

The value of sales at cost is calculated with the use of following table:

_____________

Step 3: Calculate Estimated Inventory at May 31

The value of estimated inventory can be calculated with the use of following formula:

Value of Estimated Inventory = Goods Available at Cost - Sales at Cost

______

Using the values calculated in Step 1 and Step 2, we get,

Value of Estimated Inventory = 818,000 - 715,385 = $102,615.38 or $102,615 (answer)

______

Notes:

There can be a slight difference in the final answer on account of approximations.

Inventory at May 1 (At Cost) 160,000 Purchases (At Cost) 640,000 Less Purchase Discounts -12,000 Freight In 30,000 Goods Available (At Cost) $818,000

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