Aac550 Project

AC 550

Project 2

Part 1 Gross Profit Method

Horton, Inc. suffered an inventory loss due to a flood. The following information is available to you.

Beginning inventory $100,000

Net purchase 400,000

Sales 400,000

Inventory salvaged from flood 50,000

Instructions

Use the gross profit method for estimating inventory to determine the loss due to the flood, assuming (a) gross profit is 25% of sales, and (b) gross profit is 25% of the cost of goods sold.

a) Solution

Beginning inventory $100,000

Purchase 400,000

Goods available 500,000

Sales 400,000

Less : Gross profit (25%) 100,000

Sales 300,000

Approximate inventory 200,000

b) Solution

400,000 * 25 %= 100,000 (gross profit on sales)

400,000 – 100,000= 300,000 (cost of goods sold)

500,000 – 300,000 = 200,000 (ending inventory)

Part 2 Retail Inventory Method

The records of Greene Company report the following data for the month of April.

Sales $204,000 Purchases (at cost) $ 96,000

Sales returns 4,000 Purchases (at sales price) 176,000

Additional markups 20,000 Purchase returns (at cost) 4,000

Markup cancellations 3,000 Purchase returns (at sales price) 6,000

Markdowns 18,600 Beginning inventory (at cost) 60,000

Markdown cancellations 5,600 Beginning inventory (at sales price) 93,000

Freight on purchases 2,000

Instructions

Compute the ending inventory by the conventional retail inventory method.

Solution

Cost Retail

Beginning inventory 60,000 93,000

Purchase 96,000 176,000

Freight in 2,000

Purchase return (4,000) (6,000)

Available for Sale 154,000 263,000

Add

Markup 20,000

Less markup cancelation 3,000

Net markup 17,000

154,000 280,000

Cost to retail ratio...