A company that has operated with a 30% average gross profit ratio for a number of years had $100,000 in sales during the first quarter of this year. If it began the quarter with $18,000 of inventory at cost and purchased $72,000 of inventory during the quarter, its estimated ending inventory by the gross profit method is:
A) $30,000.
B) $21,000.
C) $20,000.
D) $18,000.
E) $27,000.

Question

Quizplus · Accepted Answer

Using the gross profit method, we can calculate the estimated cost of goods sold (COGS) during the quarter:
$100,000 in sales * (1 - 30% gross profit ratio) = $70,000 COGS

To find the estimated ending inventory, we can subtract the COGS from the total cost of inventory available:
$18,000 beginning inventory + $72,000 purchases = $90,000 total inventory available
$90,000 total inventory available - $70,000 estimated COGS = $20,000 estimated ending inventory

Therefore, the answer is (C) $20,000.

A Company That Has Operated with a 30% Average Gross