As a result of taking a physical inventory count on December 31, 2010, the Lisa Company inventory was determined to be $61, 500.The auditors for Lisa suspected an inventory shortage and used the gross profit method to estimate the ending inventory.The accounting records for the company contained the following information: $\begin{array}{ll}
\text { Inventory }(1 / 1 / 10) & \$ 130,000 \
\text { Purchases }(2010) & 760,000 \
\text { Sales }(2010) & 1,020,000 \
\text { Sales returns }(2010) & 60,000 \
\text { Grossprofit ratio } & 25 \% \text { of sales }
\end{array}$ Using the gross profit method, what did the auditors estimate as the amount of the inventory that should have been on hand at December 31, 2010?

Question

Quizplus · Accepted Answer

The estimated ending inventory is calculated as follows:  1. Net sales = Sales - Sales returns = $1,020,000 - $60,000 = $960,000  2. Gross profit = 25% of net sales = 0.25 * $960,000 = $240,000  3. Cost of goods sold (COGS) = Net sales - Gross profit = $960,000 - $240,000 = $720,000  4. Estimated ending inventory = Beginning inventory + Purchases - COGS = $130,000 + $760,000 - $720,000 = $170,000.

As a Result of Taking a Physical Inventory Count on December