A firm had a beginning inventory balance of $1,000, net purchases of $35,000, and sales of $40,000. Its gross margin percentage was 25 percent. Using the gross margin method, the ending inventory balance is

Question

Quizplus · Accepted Answer

Using the gross margin method, we can calculate the ending inventory balance by subtracting the cost of goods sold (COGS) from the total cost of inventory (beginning inventory + net purchases):

Total cost of inventory = Beginning inventory + Net purchases 
Total cost of inventory = $1,000 + $35,000 = $36,000

COGS = Sales x (1 - Gross margin percentage) 
COGS = $40,000 x (1 - 0.25) = $30,000

Ending inventory balance = Total cost of inventory - COGS 
Ending inventory balance = $36,000 - $30,000 = $6,000

A Firm Had a Beginning Inventory Balance of $1,000, Net