Pearl Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May. Inventory, May 1 $ 163,800
Purchases (gross) 651,200
Freight-in 29,500
Sales revenue 925,900
Sales returns 66,700
Purchase discounts 11,300
(a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales.(b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.

$231,760.00  

$172,276.92

Explanation:

First and foremost we need to ascertain cost of goods available for sale:

Cost of goods available for sale=opening inventory+ net purchases+ freight

opening inventory=$163,800

net purchases=$651,200-$11,300=$639,900

freight cost is $29,500

cost of goods available for sale=$163,800+$639,900+$29,500=$833,200

cost of sales= net sales-gross profit

=($ 925,900-$66,700)-30%*($ 925,900-$66,700)=$601,440.00

ending inventory=$833,200-$601,440=$231,760.00  

30% of cost:

cost of sales= net sales-gross profit

=($ 925,900-$66,700)-30/130*($ 925,900-$66,700)=$660,923.08  

ending inventory=$833,200-$660,923.08=$172,276.92  

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