On March 31, a company needed to estimate its ending inventory to prepare its first quarter financial statements. The following information is available:
Beginning inventory, January 1: $4,000
Net sales: $80,000
Net purchases: $78,000
The company's gross margin ratio is 25%. Using the gross profit method, the estimated ending inventory value would be what?
Gross Profit Percentage:
The gross profit percentage is computed by dividing the gross profit by the sales revenue. Sales revenue is made up of gross profit and the cost of goods sold. The sum of the gross profit margin ratio and the cost of goods sold ratio is 100%.
Answer and Explanation:
The estimated ending inventory value would be $22,000.
Explanation: The estimated ending inventory value would be $22,000 ($4,000 + $78,000 - $80,000 x 75%).
Note: The gross profit margin is 25% hence the cost of goods would be 75% of the sales value.
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 17