Question

On January 1, JKR Shop had $225,000 of inventory at cost. In the first quarter of the year, it purchased $795,000 of merchandise, returned $11,550, and paid freight charges of $18,800 on purchased merchandise, terms FOB shipping point. The company’s gross profit averages 30%, and the store had $1,000,000 of net sales (at retail) in the first quarter of the year. Use the gross profit method to estimate its cost of inventory at the end of the first quarter.

Answer 1

The estimated cost of inventory at the end of the first quarter is $327,250.

Step-by-step explanation:

Gross profit : The gross profit represents the difference between sale price and purchase price.

The gross profit margin shows the ratio between gross profit and sales.

The calculation of cost of ending inventory is shown below:

First we have to calculate the cost of good sold.

Cost of goods sold = Beginning Merchandise inventory + Purchase of merchandise inventory - Returned Merchandise inventory + Freight charges

= $225,000 + $795,000 - $11,550 + $18,800

= $1,027,250

Now, we have to calculate the approximate cost of goods sold.

Since gross profit is 30% and net sales is $1,000,000

And, The Gross profit = Sales - cost of goods sold

So the Approximate cost of good sold = Net sales × (1 - 30%)

= $1,000,000 × 70%

= $700,000

Here 70% is the cost of goods sold percentage and 1 here denotes sales.

After considering these amounts, the ending inventory would be

= Cost of goods sold - Approximate cost of goods sold

= $1,027,250 - $700,000

= $327,250

Hence, the estimated cost of inventory at the end of the first quarter is $327,250.