Question

Grant Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically, the company has had a 30% gross profit rate. During June, net sales amounted to $100,000; the beginning inventory on June 1 was $30,000: and the cost of goods purchased during June amounted to $50,000. The estimated cost of Grant Company's inventory on June 30 is?

A. $10,000
B. $70,000
C. $50,000
D. $30,000

Answer 1

To estimate the ending inventory using the gross profit method, the cost of goods sold is calculated by subtracting the gross profit from net sales. With a 30% gross profit rate on $100,000 of net sales, the COGS is $70,000. Then, by adding beginning inventory and purchases and subtracting COGS, the estimated ending inventory is $10,000.

Step-by-step explanation:

Estimating Inventory Using the Gross Profit Method

When estimating the cost of Grant Company's inventory on June 30 using the gross profit method, the following steps are taken: First, calculate the cost of goods sold (COGS) by subtracting the gross profit from net sales. The gross profit rate is provided as 30%, so the gross profit would be $100,000 x 30% = $30,000. The COGS is then $100,000 - $30,000 = $70,000. Next, to find the estimated ending inventory, we add the beginning inventory to the purchases and subtract the COGS. The calculation is as follows: $30,000 (beginning inventory) + $50,000 (purchases) - $70,000 (COGS) = $10,000 (estimated ending inventory).

Therefore, the correct answer to the estimated cost of Grant Company's inventory on June 30 is A. $10,000.