Old Rose Company's pricing structure has been established to yield a gross margin of 30%. The following data pertain to the year ended December 31, 2019: Sales - P2,000,000 Inventory, January 1 2019 - 1,000,000 Purchases - P800,000 Freight cost on purchases - P20,000 Freight cost on merchandise sold - P30,000 Inventory inside the company's warehouse, per actual account on December 31, 2019 - P160,000 Credit Memo issued to customers for goods returned and received - P50,000 Credit memos issued to customers for merchandise to be returned, January 2, 2020 - P40,000 Sales Discount - P100,000 Old Rose Company is satisfied that all sales and purchases have been fully and properly recorded. REQUIRED: How much would Old Rose Company reasonably estimate as a shortage in inventory at December 31, 2019? WITH EXPLANATION PLS!

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A:

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.