San Sebastian College Recoletos

Canlubang Campus

Financial Management II

GROSS PROFIT AND RETAIL METHOD

1. Anne Company reported the following information for 2013:

Inventory, January 1 5,000,000

Net purchases 23,000,000
Sales 30,000,000
Sales returns 3,000,000
Sales discounts 1,000,000

A physical inventory taken on December 31, 2013 resulted in an ending inventory of P4,000,000. On
December 31, 2013, unsold goods on consignment with selling price of P1,000,000 are in the hands of
a consignee. The gross profit was 25% on cost. On December 31, 2013, what is the estimated cost of
inventory shortage?

a. 2,400,000
b. 1,400,000
c. 1,600,000
d. 1,275,000

2. On the nights of December 31, 2013, a fire destroyed most of the merchandise inventory of Kristina
Company. All goods were completely destroyed except for partially damaged goods that normally sell
for P100,000 and that had an estimated net realizable value of P25,000 and undamaged goods that
normally sell for P60,000.

Inventory, January 1, 2013 600,000

Net purchases for 2013 4,300,000
Net sales for 2013 5,600,000

Total 2012 2011 2010

Net sales 9,000,000 5,000,000 3,000,000 1,000,000
Cost of sales 6,750,000 3,840,000 2,200,000 710,000
Gross income 2,250,000 1,160,000 800,000 290,000

What is the estimated amount of fire loss on December 31, 2013?

a. 700,000
b. 615,000
c. 630,000
d. 580,000
3. On December 31, 2013, a fire damaged the warehouse and factory of Pauline Company completely
destroying the work in process inventory. There was no damage to either the raw materials or finished
goods. The physical inventory revealed the following:

January 1 December 31

Raw materials 1,700,000 2,000,000

Work in process 4,300,000 0
Finished goods 6,000,000 4,500,000

The gross profit margin historically approximated 30% of sales. The sales for the year amounted to
P20,000,000. Raw materials purchases totaled P4,000,000. Direct labor costs for the year amounted to
P5,000,000, and manufacturing overhead has been applied at 60% of direct labor. What was the
inventory fire loss on December 31, 2013?
 a. 3,500,000
b. 3,800,000
c. 2,500,000
d. 1,500,000

4. Krizzadel Company used the retail inventory to approximate the ending inventory. The following
information is available for the current year:

Cost Retail
Beginning inventory 650,000 1,200,000
Purchases 9,000,000 14,700,000
Freight in 200,000
Purchase returns 300,000 500,000
Purchase allowances 150,000
Departmental transfer in 200,000 300,000
Net markups 300,000
Net markdowns 1,000,000
Sales 9,500,000
Sales discounts 100,000
Employee discounts 500,000
Estimated normal shoplifting losses 600,000
Estimated normal shrinkage 400,000

1. What is the estimated cost of ending inventory using the consecutive approach?
a. 2,400,000
b. 2,460,000
c. 3,060,000
d. 2,700,000

2. What is estimated cost of ending inventory using the average cost approach?
a. 2,560,000
b. 2,624,000
c. 3,264,000
d. 2,880,000

5. Maricel Company provided the following amounts all at retail:

Beginning inventory 200,000 Sales 3,600,000

Purchases 6,000,000 Sales return 100,000
Purchase return 300,000 Employee discounts 250,000
Net markup 900,000 Normal shortage 200,000
Net markdown 150,000 Abnormal shortage 400,000

What is the ending inventory at retail?

a. 2,300,000
b. 2,700,000
c. 2,800,000
d. 2,900,000

6. Nicole Company used the FIFO retail method of inventory valuation.

Cost Retail
Beginning inventory 1,400,000 2,000,000
Purchases 5,850,000 8,000,000
Net markup 1,500,000
Net markdown 500,000
Sales 7,500,000

What is the estimated cost of the ending inventory using the FIFO approach?

a. 2,275,000
b. 2,375,000
c. 2,310,000
d. 2,205,000

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