Exercise 9-12 Mark Price Company uses the gross profit method to estimate invent

Question

Exercise 9-12

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

(a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales.

(b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost. (Round percentage of sales to 2 decimal places, e.g. 78.74% and final answer to 0 decimal places, e.g. 6,225.)

Inventory, May 1 $ 166,500 Purchases (gross) 655,700 Freight-in 30,700 Sales revenue 1,007,700 Sales returns 78,200 Purchase discounts 12,530

Explanation / Answer

a) Gross profit = Net Sales - Cost of goods sold

     Net Sales = Sales - Sales Return

= 1007700 - 78200

= $ 929500

Gross profit = 30 % of Net Sales

= 30 % of 929500

= $ 278850

Cost of goods sold = Net sales - Gross profit

= 929500 - 278850

= $ 650650

Closing inventory at May 31 = Opening inventory + Purchases + Direct expenses - Cost of goods sold

   = 166500 + 655700 + 30700 - 650650

= $ 202250

(Freight-in is Direct Expense. Where as Purchase discount is indirect expense.)

Conclusion:- a) The estimated inventory at May 31 = $ 202250

b)

Gross profit = Net Sales - Cost of goods sold

     Net Sales = Sales - Sales Return

= 1007700 - 78200

= $ 929500

Gross profit = 30 % of Cost OR 30 / 130 of Sales

= 929500 * 30 / 130

= $ 214500

Cost of goods sold = Net sales - Gross profit

= 929500 - 214500

= $ 715000

Closing inventory at May 31 = Opening inventory + Purchases + Direct expenses - Cost of goods sold

   = 166500 + 655700 + 30700 - 715000

= $ 137900

(Freight-in is Direct Expense. Where as Purchase discount is indirect expense.)

Conclusion:- b) The estimated inventory at May 31 = $ 137900

     

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