(Question and Answer): Henderson Company uses the gross profit method to estimate ending inventory and cost of goods sold when

Henderson Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of July was $125,500. The following information for the month of August was available from company records:


Purchases	$	225,000
Freight-in		5,800
Sales		356,000
Sales returns		9,600
Purchases returns		4,900

In addition, the controller is aware of $10,000 of inventory that was stolen during August from one of the company’s warehouses.

Required:
1.	Calculate the estimated inventory at the end of August, assuming a gross profit ratio of 30%.

2.	Calculate the estimated inventory at the end of August, assuming a markup on cost of 25%.

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ans 1

Beginning Inventory		$125,500
Add: net purchases (225000-4900)		220100
Freight in		5800
cost of goods available for sales		$351,400
Less: Cost of good sold
Net sales N (356000-9600)	346400
Less: estimated gross profit (346400*30%)	103920
Estimated Cost of good sold		-242480
Estimated cost of inventory before theft		$108,920
Less: stolen inventory		10000
estimated ending inventory		$98,920

ans 2
Beginning Inventory		$125,500
Add: net purchases (225000-4900)		220100
Freight in		5800
cost of goods available for sales		$351,400
Less: Cost of good sold
Net sales N (356000-9600)	346400
Less: estimated gross profit (351400*25%)	$87,850
Estimated Cost of good sold		-258550
Estimated cost of inventory before theft		$92,850
Less: stolen inventory		10000
estimated ending inventory		$82,850

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