Final answer:
Using the gross profit method, the estimated inventory at May 31 is -$540,000 (decrease) assuming the gross profit is 30% of sales, and $370,000 assuming the gross profit is 30% of cost.
Step-by-step explanation:
To estimate the inventory at May 31 using the gross profit method, we need to determine the cost of goods sold (COGS) and then calculate the estimated inventory.
a. First, calculate the COGS by subtracting the gross profit from the sales revenue: $1,000,000 * 0.30 = $300,000. The COGS is $700,000 ($1,000,000 - $300,000). Then, subtract the COGS from the inventory at May 1 to get an estimated inventory at May 31: $160,000 - $700,000 = -$540,000. Since the result is negative, it indicates a decrease in inventory.
b. To find the estimated inventory at May 31 assuming the gross profit is 30% of the cost, we can calculate the gross profit by multiplying the COGS by 0.30: $700,000 * 0.30 = $210,000. The estimated inventory at May 31 is then $160,000 + $210,000 = $370,000.