Indigo Company uses the gross profit method to estimate inventory for monthly re

Question

Indigo Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May. Inventory, May 1 Purchases (gross) Freight-in Sales revenue Sales returns Purchase discounts $165,90 633,400 30,300 1,098,100 64,700 11,400 Y (a) Your answer is correct. Compute the estimated inventory at May 31, assuming that the gross profit is 40% of net sales The estimated inventory at May 31 198160 SHOW SOLUTION SHOW ANSWER LINK TO TEXT VIDEO: SIMILAR EXERCISE Attempts: 3 of 3 used ? (b) Compute the estimated inventory at May 31, assuming that the gross profit is 40% ofcost. (Round percentage of sales to 2 decimal places, eg. 78.74% and final answer to 0 decimal places, eg. 6,225.) The estimated inventory at May 31

Explanation / Answer

Solution:

Part 2 --

Gross Profit = 40% of Cost

It means Sales Price = Cost of Goods Sold + 40% Gross Profit on Cost of Goods Sold i.e. 0.40 COGS

So,

Sales Price = 1.4 COGS

COGS = Sales Price / 1.4

Putting the value into the above equation, we get

COGS = Net Sales (1098,100 – 64,700) / 1.4 = $1,033,400 /1.4 = $738,143

COGS = Beg Inventory + Net Purchases – Ending Inventory

$738,143 = 165,900 + (633,400 + 30,300 – 11,400) – Ending Inventory

$738,143 = 165,900 + 652,300 – Ending Inventory

Ending Inventory = 818,200 – 738,143 = $80,057

Ending Inventory Value at May 31 = $80,057

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