A retail store has beginning inventory of $60,000,purchases of $440,000,sales of $400,000,and a normal gross margin of 25 percent.What is estimated inventory based on these facts and the gross profit method?

Question

Quizplus · Accepted Answer

Using the gross profit method, we can estimate the ending inventory by subtracting the cost of goods sold (COGS) from the total cost of goods available for sale (beginning inventory + purchases).

Total cost of goods available for sale = beginning inventory + purchases 
= $60,000 + $440,000 
= $500,000

COGS = Sales / (1 - Gross Margin %) 
= $400,000 / (1 - 0.25) 
= $533,333.33

Estimated ending inventory = Total cost of goods available for sale - COGS 
= $500,000 - $533,333.33 
= -$33,333.33 (negative result indicates an error in calculations)

This means that the estimated ending inventory is not plausible, and we need to adjust either the COGS or the gross margin percentage. Since the gross margin percentage is a normal one, we can assume that the COGS calculation is likely incorrect.

To find the correct COGS, we can subtract the gross margin from the sales:

Gross margin = Sales x Gross Margin % 
= $400,000 x 0.25 
= $100,000

COGS = Sales - Gross margin 
= $400,000 - $100,000 
= $300,000

Estimated ending inventory = Total cost of goods available for sale - COGS 
= $500,000 - $300,000 
= $200,000

Therefore, the estimated inventory based on these facts and the gross profit method is $200,000 (Choice C).

A Retail Store Has Beginning Inventory of $60,000,purchases of $440,000,sales