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1) Estimating Inventory Using Gross Profit Method Assume that we are auditing the records of Forde Corporation
1) Estimating Inventory Using Gross Profit Method Assume that we are auditing the records of Forde Corporation. A physical inventory has been taken by the company under our observation. However, the valuation extensions have not been completed. The records of the company show the following account data. The gross margin last period was 35% of net sales; we anticipate that it will be 25% for the year under audit.
Sales, gross $540,000
Sales returns (returned to inventory) $8,000
Purchases, gross $248,000
Beginning inventory $160,000
Freight-in $11,200
Purchase returns and allowances $3,200
Estimate the cost of ending inventory using the gross profit method.
2) If Tonya purchased 200 decorative pillows at $12 each and sold 75 of the pillows for $20 each, what is the cost of goods sold?
Expert Solution
1) Computation of the cost of ending inventory using the gross profit method:-
Net Sales = Gross sales - Sales returns
= $540,000 - $8,000
= $532,000
Gross profit = Net sales * 25%
= $532,000 * 25%
= $133,000
Net Purchases = Purchases - Purchases returns & allowances
= $248,000 - $3,200
= $244,800
Ending inventory = Beginning inventory + Net purchases + Freight in + Gross profit - Net sales
= $160,000 + $244,800 + $11,200 + $133,000 - $532,000
= $17,000
2) Computation of the cost of goods sold:-
Cost of goods sold = Units sold * Purchase price
= 75 * $12
= $900
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