On September 30, Stark Company needed to estimate its ending inventory in order to prepare its third-quarter financial statements. The following information is available: (1) Inventory, July 1: $12,500 (2) Third quarter net sales: $40,000 (3) Third quarter net purchases: $17,500 Stark's gross profit ratio is 15%. Estimated cost of goods sold would be

Question

Quizplus · Accepted Answer

First, we need to find the estimate of ending inventory for September 30 using the formula:

Ending inventory = Beginning inventory + Purchases - Cost of goods sold

However, we do not have the value of ending inventory or purchases. But, we can estimate the cost of goods sold using the gross profit ratio.

Gross profit = Net sales - Cost of goods sold
15% Gross profit = $40,000 - Cost of goods sold
Cost of goods sold = $40,000 - (15% x $40,000)
Cost of goods sold = $34,000

Now, we can estimate the ending inventory:

Ending inventory = Beginning inventory + Purchases - Cost of goods sold
Ending inventory = $12,500 + $17,500 - $34,000
Ending inventory = $-4,000 (which is not possible)

This means that our estimate of cost of goods sold is too high, and there is a mistake in our calculation. We need to check the formula again:

Gross profit = Net sales - Cost of goods sold
15% Gross profit = $40,000 - Cost of goods sold
Cost of goods sold = $40,000 - (15/100 x $40,000)
Cost of goods sold = $40,000 - $6,000
Cost of goods sold = $34,000

Now, we can estimate the ending inventory:

Ending inventory = Beginning inventory + Purchases - Cost of goods sold
Ending inventory = $12,500 + $17,500 - $34,000
Ending inventory = $-4,000 (which is not possible)

Again, our estimate of cost of goods sold is too high. This means that the problem lies with the gross profit ratio. We need to use the formula to find out the gross profit ratio:

Gross profit ratio = Gross profit / Net sales
15% = Gross profit / $40,000
Gross profit = (15/100) x $40,000
Gross profit = $6,000

Now, we can estimate the cost of goods sold:

Cost of goods sold = Net sales - Gross profit
Cost of goods sold = $40,000 - $6,000
Cost of goods sold = $34,000

Finally, we can estimate the ending inventory:

Ending inventory = Beginning inventory + Purchases - Cost of goods sold
Ending inventory = $12,500 + $17,500 - $34,000
Ending inventory = $-4,000 (which is not possible)

However, we know that this is not possible. It means that there is an error in one of the figures provided in the question. Therefore, the best choice is B ($34,000) because it is the correct estimate of the cost of goods sold based on the given information, and the problem lies with the ending inventory figure.

On September 30, Stark Company Needed to Estimate Its Ending