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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: $5,000 Net sales: $50,000 Net purchases: $51,000 The company's gross margin ratio is 15%. Using the gross profit method, the cost of goods sold would be:

$6,000. $26,500. $5,000. $31,500. $42,500.

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Answer:

Using the gross profit method, the cost of goods sold would be:

$42,500

Explanation:

Gross margin ratio of the company is 15%. Refer the formula:

Gross margin = Gross profit/Revenue (or net sales)

= (Net sales- Cost of good sold)/Net sales

Using the gross profit method and from the formula,

Cost of good sold = Net sales - Net sales x Gross margin

= Net sales x (1 - Gross margin)

=  $50,000 x (1-0.15) = $50,000 x 0.85 = $42,500

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