When preparing its quarterly financial statements, Pace Company uses the gross margin method to estimate ending inventory. The following information is available for the quarter ending March 31, Year 2: What is the estimated amount of inventory that is on hand on March 31, Year 2?

Question

When preparing its quarterly financial statements, Pace Company uses the gross margin method to estimate ending inventory. The following information is available for the quarter ending March 31, Year 2:  What is the estimated amount of inventory that is on hand on March 31, Year 2?

Quizplus · Accepted Answer

Using the gross margin method, we can calculate the cost of goods sold (COGS) for the quarter:
COGS = net sales - gross profit = $945,000 - ($945,000 x 40%) = $567,000
We can then use the COGS and the beginning inventory ($315,000) to estimate the cost of goods available for sale:
Cost of goods available for sale = beginning inventory + COGS = $315,000 + $567,000 = $882,000
Finally, we can estimate the ending inventory using the cost of goods available for sale and the gross profit percentage:
Ending inventory = cost of goods available for sale x (1 - gross profit percentage) = $882,000 x (1 - 40%) = $529,200
Therefore, the estimated amount of inventory on hand on March 31, Year 2 is $206,250.

When Preparing Its Quarterly Financial Statements, Pace Company Uses the Gross