Asked by Grace Gallagher on May 20, 2024
Verified
Refer to Exhibit 9-3.The estimated inventory at January 31, 2010, is
A) $25, 500
B) $21, 500
C) $16, 000
D) $12, 000
Gross Profit Method
This is an accounting technique used to estimate inventory value, calculating gross margin as a percentage of sales to find the cost of goods sold and ending inventory.
Markup on Cost
The percentage added to the cost of goods to cover overhead and profit, calculated by dividing the gross profit by the cost.
- Recognize the application and impact of the gross profit method on inventory estimation and valuation.
Verified Answer
FA
Frances AdamsMay 21, 2024
Final Answer :
B
Explanation :
The gross profit method estimates ending inventory by applying a gross profit rate to sales to estimate cost of goods sold, which is then subtracted from the total goods available for sale. Here, the markup on cost is 50%, meaning the cost is 2/3 of the sales price (since cost + 50% of cost = sales price, or cost = 2/3 of sales price). The cost of goods sold (COGS) can be estimated from sales: $24,000 sales * (2/3) = $16,000 COGS. Goods available for sale is the beginning inventory plus purchases: $12,500 + $25,000 = $37,500. Subtracting the estimated COGS from goods available for sale gives the estimated ending inventory: $37,500 - $16,000 = $21,500.
Learning Objectives
- Recognize the application and impact of the gross profit method on inventory estimation and valuation.