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The Baldwin Wholesale Company has begun 2013 with an inventory of $400,000 and ended the year...

Question:

The Baldwin Wholesale Company has begun 2013 with an inventory of $400,000 and ended the year with an inventory of $500,000. The company's gross profit ratio is 25%, the inventory turnover ratio is 2, and the receivables turnover ratio is 4. Accounts receivable at the beginning of 2013 totaled $250,000.

Required:

Determine the following for 2013:

a. Sales revenue

b. Cost of goods sold

c. Gross profit

Gross Profit

Gross profit is the profit generated after accounting for the costs for making the products that are sold. Gross profit is equal to the difference between sales and cost of sales. Gross profit is the amount of profit available for selling and administrative expenses before arriving at the net income figure. Gross profit is also expressed int terms of percentages known as the gross profit ratio. The gross profit ratio is proportion of the gross profit to the total sales revenue.

Answer and Explanation:

b. Cost of goods sold can be calculated using the inventory turnover ratio formula. The inventory turnover ratio is calculated by dividing the cost of goods sold with the average inventory. The inventory turnover ratio is given at 2 while the average inventory can be computed using the given data.

Beginning inventory $400,000
Add: Ending inventory 500,000
Balance $900,000
Divided by: 2 2
Average inventory $450,000

Now that average inventory is determined, the cost of goods sold can now be computed.

  • Inventory turnover ratio = Cost of goods sold / Average inventory
  • Cost of goods sold = Inventory turnover ratio * Average inventory
  • Cost of goods sold = 2 * $450,000
  • Cost of goods sold = $900,00

a. Sales revenue can be calculated using the gross profit ratio. Since the gross profit ratio is 25%, the cost of goods sold ratio must be 75%. The cost of goods sold ratio is calculated by dividing the cost of goods sold with the sales revenue

  • Cost of goods sold ratio = Cost of goods sold / Sales revenue
  • Sales revenue = Cost of goods sold / Cost of goods sold ratio
  • Sales revenue = $900,000 / 75%
  • Sales revenue = $1,200,000

c. The gross profit is simply calculated by subtracting the cost of goods sold from the sales revenue.

Sales revenue $1,200,000
Less: Cost of goods sold 900,000
Gross profit $300,000

Learn more about this topic:

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How to Calculate Gross Profit Margin: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 17
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