Asked by Alexandra Barrett on May 21, 2024
Verified
E. Preslay Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically the company has had a 40% gross profit rate. During June net sales amounted to $200000; the beginning inventory on June 1 was $60000; and the cost of goods purchased during June amounted to $90000. The estimated cost of E. Preslay Company's inventory on June 30 is
A) $24000.
B) $30000.
C) $70000.
D) $140000.
Gross Profit Method
An accounting technique used to estimate inventory levels and cost of goods sold by utilizing the gross profit margin.
Net Sales
The total revenue from sales minus returns, allowances for damaged or missing goods, and discounts.
- Analyze the effects of inventory estimation methods on the cost of goods sold and ending inventory valuation.
Verified Answer
RV
Rowall vasquezMay 21, 2024
Final Answer :
B
Explanation :
First, we need to calculate the cost of goods sold during June:
Beginning inventory: $60,000
Add purchases: $90,000
= Cost of goods available for sale: $150,000
Subtract ending inventory (unknown): $xx
= Cost of goods sold: $xx
To estimate the ending inventory, we can use the gross profit method:
Gross profit rate: 40%
Net sales: $200,000
Cost of goods sold: $xx
= Gross profit: $80,000
We can then use the gross profit to estimate the cost of goods sold:
Gross profit: $80,000
Cost of goods sold: $xx
= Net sales - Gross profit: $120,000
Now we can calculate the ending inventory:
Cost of goods available for sale: $150,000
Cost of goods sold: $120,000
= Ending inventory: $30,000
Therefore, the estimated cost of E. Preslay Company's inventory on June 30 is $30,000 (Option B).
Beginning inventory: $60,000
Add purchases: $90,000
= Cost of goods available for sale: $150,000
Subtract ending inventory (unknown): $xx
= Cost of goods sold: $xx
To estimate the ending inventory, we can use the gross profit method:
Gross profit rate: 40%
Net sales: $200,000
Cost of goods sold: $xx
= Gross profit: $80,000
We can then use the gross profit to estimate the cost of goods sold:
Gross profit: $80,000
Cost of goods sold: $xx
= Net sales - Gross profit: $120,000
Now we can calculate the ending inventory:
Cost of goods available for sale: $150,000
Cost of goods sold: $120,000
= Ending inventory: $30,000
Therefore, the estimated cost of E. Preslay Company's inventory on June 30 is $30,000 (Option B).
Learning Objectives
- Analyze the effects of inventory estimation methods on the cost of goods sold and ending inventory valuation.
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