Francine Ltd.had beginning inventory of $10,000 and purchased $75,000 during 2011.The company had sales of $90,000 and has traditionally had a cost-to-sales ratio of 75%.Using the gross margin estimation method, the company estimates its ending inventory to be:
A)$67,500
B)$65,000
C)$17,500
D)$22,500

Question

Quizplus · Accepted Answer

The gross margin estimation method estimates the cost of goods sold (COGS) by applying the cost-to-sales ratio to the sales figure. Here, COGS = $90,000 * 75% = $67,500. Beginning inventory + Purchases - COGS = Ending Inventory, so $10,000 + $75,000 - $67,500 = $17,500.