Sample Problems in Chapter 8 Inventory Estimation

1. The following data relate to the records of KEEP FIGHTING Corp. for the month of September:

Sales ................................................. P160,000

Beginning inventory ................................... P 20,000
Purchases ............................................. 180,000
Goods available for sale .............................. P200,000

Using these data, estimate the cost of ending inventory for each situation below:
(a) Markup is 50 percent on cost.
(b) Markup is 60 percent on sales.
(c) Markup is 25 percent on cost.
(d) Markup is 40 percent on sales.

Sales 150% 160,000 B. 100% 160,000 125% 160,000

Less: COGS 100% 106,667 40% 64,000 100% 128,000
Gross Profit 50% 60% 25%

Sales 100% 160,000

Less: COGS 60% 96,000
Gross Profit 40%

Beginning inventory
Add: Purchases
TGAS 200,000 200,000 200,000 200,000
Less: COGS 106,667 64,000 128,000 96,000
E.I. A 93,333 B.136,00 C. 72,000 D.104,000

2. The following information appears in BABAWI AKO Company's records for the year ended
December 31:

Inventory, January 1 .................................. P 325,000

Purchases ............................................. 1,150,000
Purchase returns ...................................... 40,000
Freight-in ............................................ 30,000
Sales ................................................. 1,700,000
Sales discounts ....................................... 10,000
Sales returns ......................................... 15,000

On December 31, a physical inventory revealed that the ending inventory was only P210,000.
BABAWI AKO's gross profit on net sales has remained constant at 30 percent in recent years.
BABAWI AKO suspects that some inventory may have been pilfered by one of the company's
employees. At December 31, what is the estimated cost of missing inventory?
Inventory, January 1 P 325,000
Add: Net cost of Purchases (1,150,000-40,000+30,000) 1,140,000
TGAS 1,465,000
Less: Estimated Cost of Goods 1,179,500
Ending inventory (should be/estimated) 285,500
Ending inventory (physical count) 210,000
Cost of missing inventory 75,500

Net Sales 100% (1,700,000-15,000) 1,685,000

Less: COGS 70% (1,685,000 x 70%) 1,179,500
Gross Profit 30%

3. On June 19, 2005, a fire destroyed the entire uninsured merchandise inventory of the KAYA
YAN Merchandising Company. The following data are available:

Inventory, January 1 .................................. P 80,000

Purchases, January 1 through June 19 .................. 560,000
Sales, January 1 through June 19 ...................... 776,000
Markup percentage on cost ............................. 25%

What is the approximate inventory loss as a result of the fire?

Sales 125% 776,000

COGS 100% 620,800
GP 25%

Inventory beg. 80,000

Add: Purchases 560,000
TGAS 640,000
Less: COGS 620,800
Inventory Loss 19,200

4. GOD’S GRACE Company uses the retail inventory method. Information relating to the
computation of the inventory at December 31, 2020, is as follows:
Cost Retail
Inventory at January 1, 2020 90,000 150,000
Sales 1,200,000
Purchases 540,000 1,180,000
Freight-in 13,500
Markups 100,000
Markdowns 40,000
Estimated normal shrinkage 2% of sales

Compute for ending inventory and cost of goods sold under the following methods:
a. Average cost method
b. FIFO cost method

RETAIL METHOD
 Average cost method

Cost ratio = TGAS @ cost/TGAS @ sales price/retail price

COGS = Net sales x cost ratio

E.I. @ cost = EI @ retail x Cost ratio

FIFO Method

Cost ratio = TGAS @ cost less beg. inventory/TGAS @ SP/retail less beg. Inventory @ retail

COST RETAIL
Inventory at January 1, 2020 90,000 150,000
Net Cost of Purchases 553,500 1,180,000
Markups 100,000
Markdowns (40,000)
TGAS 643,500 1,390,000
Sales 1,200,000 x 102% 1,224,000
Ending Inventory 166,000

Cost ratio = 643,500/1,390,000 =46.29%

Ending inventory @ retail P166,000

Cost ratio 46.29% 46%
Ending inventory at cost 76,841.40 76,360

TGAS @ cost 643,500

Ending inventory @ cost 76,841.40
COGS 566,659 567,140

OR

Net Sales 1,224,000

Cost ratio 46.29%
COGS 566,590

FIFO method

Cost ratio = (643,500-90,000)/(1,390,000-150,000) =44.64%

Ending inventory @ retail P166,000

Cost ratio 44.64% 45%
Ending inventory at cost 74,102
TGAS @ cost 643,500
Ending inventory @ cost 74,102
COGS 569,398

OR

Net Sales 1,224,000

Beg. Inventory @ retail 150,000
Balance 1,074,000
Cost ratio 44.64%
Total 479,434
Beg. Inventory @ cost 90,000
COGS 569,434

5. The CPA Company use retail inventory method. Information relating to the computation of
the inventory at December 31, 2018, is as follows:
Cost Retail
Inventory at January 1, 2018 70,000 160,000
Sales 1,160,000
Purchases 540,000 1,200,000
Freight-in 15,200
Net Markups 80,000
Net Markdowns 40,000

Compute for ending inventory and cost of goods sold under the following methods:
a. Average cost method
b. FIFO cost method

COST RETAIL
Inventory at January 1, 2018 70,000 160,000
Net Cost of Purchases 555,200 1,200,000
Net markups 80,000
Net Markdowns (40,000)
TGAS 625,200 1,400,000
Sales 1,160,000
Ending Inventory @ retail 240,000

AVE. METHOD
COST RATIO = 625,200/1,400,000 = 44.66%

E.I. @ cost = 240,000 x 44.66% = 107,184 45% = 108,000

COGS = 625,200-107,184 = 518,016 517,200

FIFO METHOD
COST RATIO = (625,200-70,000)/(1,400,000-160,000) = 44.77%

Sales 1,160,000
Beg. Inventory @ retail (160,000)
Total 1,000,000
Cost ratio 44.77% 45%
Balance 447,700 450,000
Beg. Inventory @ cost 70,000
COGS 517,700 520,000

COGS = 625,200-108,000 = or 517,200

E.I. = 240,000 x 44.77% = 107,448 108,000