What is the ending inventory in the following case?
A company that has operated with a 30% average gross profit ratio for a number of years had $100,000 in sales during the first quarter of this year. If it began the quarter with $18,000 of inventory at cost and purchased $72,000 of inventory during the quarter, its estimated ending inventory using the gross profit method is:
The company operates at 30% gross profit. It had sales of $100,000 in the first quarter of the year. The inventory at the beginning of the year is $18000 and during the quarter inventory worth $72000 was purchased.
The total value of the initial inventory and that purchased during the quarter is 18000 + 72000 = $90000. The sales is $100000. As the gross profit is 30%, the cost of the sales is $70000.
$90000 is the sum of the cost of inventory that was already with the company and what it bought. Of this $70000 worth of inventory is sold.
The value of the inventory that remained with the company is $20,000 or the right answer is option C.