On March 31 a company needed to estimate its ending inventory to prepare its first quarter financial statements. The following information is available: Beginning inventory, January 1: $4,700 Net sales: $76,000 Net purchases: $74,000 The company's gross margin ratio is 20%. Using the gross profit method, the estimated ending inventory value would be:

The estimated ending inventory by the gross profit method is $19,900

Explanation:

In order to calculate the estimated ending inventory value we would have to calculate first the following:

Step 1- Calculating Gross profit:

Gross profit ratio = Gross profit/ Sales

20% = Gross profit/ $76,000

Gross profit = $76,000 x 20%

Gross profit = $76,000 x 20%

Gross profit = $15,200

Step 2- Calculating Cost of Goods sold (COGS):

Sales - COGS = Gross profit

$76,000 - COGS = $15,200

COGS = $76,000 - $15,200

COGS = $60,800

Step 3- Calculating Ending Inventory:

COGS = Beginning inventory + Inventory purchases - Ending inventory

$60,800 = $4,700 + $76,000  - Ending inventory

$60,800 = $80,700 - Ending inventory

Ending inventory = $80,700 -$60,800

Ending inventory = $19,900

Therefore,  the estimated ending inventory by the gross profit method is $19,900.

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