Exhibit 9-3 The Donna Company uses the gross profit method to estimate its inventory in interim financial statements.The markup on cost is 50%.The following information is available:
$\begin{array}{ll}
\text { January } 1,2010, \text { inventory balance } & \$ 12,500 \
\text { Purchases } & 25,000 \
\text { Sales churing J anuary } & 24,000
\end{array}$
- Refer to Exhibit 9-3.The estimated inventory at January 31, 2010, is

Question

Quizplus · Accepted Answer

The gross profit method estimates ending inventory by applying a gross profit rate to sales to estimate cost of goods sold, which is then subtracted from the total goods available for sale. Here, the markup on cost is 50%, meaning the cost is 2/3 of the sales price (since cost + 50% of cost = sales price, or cost = 2/3 of sales price). The cost of goods sold (COGS) can be estimated from sales: $24,000 sales * (2/3) = $16,000 COGS. Goods available for sale is the beginning inventory plus purchases: $12,500 + $25,000 = $37,500. Subtracting the estimated COGS from goods available for sale gives the estimated ending inventory: $37,500 - $16,000 = $21,500.

Exhibit 9-3 the Donna Company Uses the Gross Profit Method