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On January 31, a company needed to estimate its ending inventory to prepare its monthly financial statements. The following information is currently available: Inventory as of January 1: $120,500 Net sales for January: $400,000 Net purchases for January: $270,500 This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross profit method would be:

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Answer:

Ending Inventory under the gross profit method would be $51,000

Explanation:

Step 1 Determine the Company`s Gross Profit Using the Gross Profit Margin

Gross Profit = $400,000×15%

                   =  $ 60,000

Step 2 Determine the Company`s Cost of Goods Sold Figure

Cost of Goods Sold = Sales - Gross Profit

                                  = $400,000-$60,000

                                  = $ 340,000

Step 3 Determine the Ending Inventory Balance

Opening Stock                      120,500

Add Purchases                     270,500

Available for Sale                  391,000

Less Cost of Goods Sold     (340,000)

Ending Inventory                     51,000

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