Royal Gorge 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 October was $58,500. The following information for the month of November was available from company records:

Royal Gorge 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 October was $58,500. The following information for the month of November was available from company records:

Purchases	$	110,000
Freight-in		3,000
Sales		180,000
Sales returns		5,000
Purchases returns		4,000

In addition, the controller is aware of $8,000 of inventory that was stolen during November from one of the company's warehouses.

Explanation:
 1.

Net purchases ($110,000 – 4,000) = $106,000

Net sales ($180,000 – 5,000) = $175,000

Estimated gross profit of 40% = $70,000

2.

Gross profit as a % of cost ÷ (1 + Gross profit as a % of cost) = Gross profit as a % of sales.

100% ÷ 200% = 50%

   

Net purchases ($110,000 – 4,000) = $106,000

Net sales ($180,000 – 5,000) = $175,000

Estimated gross profit of 50% = $87,500