Asked by Morgan Jones on May 11, 2024
Verified
Inlet Inc. has a normal gross profit of 25%. The current year's beginning inventory was $3,500, purchases were $14,000, and retail sales were $20,000. The estimated ending inventory under the gross profit method is:
A) $13,000.
B) $10,500.
C) $2,500.
D) $3,500.
Gross Profit Method
A method used to determine the value of the ending inventory using a predetermined gross profit rate. This method can be used to determine value of ending inventory if a loss from fire occurs.
Gross Profit
The financial metric calculated by subtracting cost of goods sold from total net sales, reflecting the efficiency of a company in managing its manufacturing costs.
- Apply the gross profit method to estimate inventory and understand its implications on financial reporting.
Verified Answer
MG
MEGAN GANGITANOMay 15, 2024
Final Answer :
C
Explanation :
The gross profit method estimates ending inventory by applying the gross profit percentage to sales to estimate the cost of goods sold, then subtracting this from the cost of goods available for sale. Here, the cost of goods available for sale is the beginning inventory ($3,500) plus purchases ($14,000), totaling $17,500. With a 25% gross profit, the cost of goods sold is 75% of sales, or 0.75 * $20,000 = $15,000. Subtracting the estimated cost of goods sold ($15,000) from the cost of goods available for sale ($17,500) gives an estimated ending inventory of $2,500.
Learning Objectives
- Apply the gross profit method to estimate inventory and understand its implications on financial reporting.