As a Result of Taking a Physical Inventory Count on December

question 50

Multiple Choice

As a result of taking a physical inventory count on December 31, 2014, the Mona Lisa Company inventory was determined to be $61,500. The auditors for Mona Lisa suspected an inventory shortage and used the gross profit method to estimate the ending inventory. The accounting records for the company contained the following information: $\begin{array}{ll}\$ 130,000 & \text { Inventory }(1 / 1 / 14) \\760,000 & \text { Purchases (2014) } \\1,020,000 & \text { Sales (2014) } \\60,000 & \text { Sales returns (2014) } \\25 \% \text { of sales } & \text { Gross profit ratio }\end{array}$
Using the gross profit method, what did the auditors estimate as the amount of the inventory that should have been on hand at December 31, 2014?

• A) $240,000
• B) $ 61,500
• C) $125,000
• D) $170,000

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Definitions:

Cash Account

A financial account where cash transactions are recorded, showing the cash inflows and outflows for a person or business.

Bank Reconciliation

The method of aligning the balance in a company's financial records for a cash account with the relevant details on a bank statement.

Deposits in Transit

Funds that have been received and recorded by a business but not yet processed or acknowledged by the bank.