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 using the gross profit method is:
A)$30,000
B)$21,000
C)$20,000
D)$18,000
E)$27,000

Question

Quizplus · Accepted Answer

To use the gross profit method to estimate ending inventory, we need to first calculate the cost of goods sold (COGS). We can do this by taking the cost of goods available for sale (beginning inventory + purchases) and subtracting the estimated gross profit (sales x gross profit ratio):

COGS = (Beginning inventory + Purchases) - (Sales x Gross profit ratio)
COGS = ($18,000 + $72,000) - ($100,000 x 30%)
COGS = $90,000 - $30,000
COGS = $60,000

Now we can use the gross profit method formula to estimate ending inventory:

Ending inventory = Cost of goods available for sale - COGS
Ending inventory = ($18,000 + $72,000) - $60,000
Ending inventory = $90,000 - $60,000
Ending inventory = $30,000

Therefore, the best choice is C) $20,000.

A Company That Has Operated with a 30% Average Gross