On July 23, the company’s inventory was destroyed in a hurricane-related flood.

Question

On July 23, the company’s inventory was destroyed in a hurricane-related flood. For insurance purposes, the company must reliably estimate the amount of inventory on hand on July 23. The company uses a periodic inventory system. The following data have been assembled.

            Inventory, January 1                            $1,350

            Purchases, January 1 – July 23             $4,000

            Sales, January 1 – July 23                    $6,500

            Last year’s gross profit percentage          70%

Estimate the company’s inventory as of July 23 using last year’s gross profit percentage.

  $5,150

  $4,550

  $1,950

  $800

  $3,400

  $5,350

  $5,150

  $4,550

  $1,950

  $800

  $3,400

  $5,350

Explanation / Answer

Gross Margin = Sales - (opening inventory + Purchases - closing inventory) Gross Margin = 70% of sales = 6500 * 70% = 4550 Putting the values in the above equation we get 4550 = 6500 - (1350 + 4000 - closing inventory) 4550 = 1150 + closing inventory hence closing inventory = 4550 - 1150 = 3400 Hence value of closing inventory is $ 3400

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