Gross Profit Method A fire completely destroyed all the inventory of Glisan Lumb

Question

Gross Profit Method

A fire completely destroyed all the inventory of Glisan Lumber Yard on August 5, 20--. Fortunately, the accounting records were not destroyed in the fire. The following information is provided by Glisan Lumber Yard for the time period January 1 through August 5:

Required:

Estimate the amount of merchandise inventory destroyed in the fire on August 5 using the gross profit method.
$

Beginning inventory, January 1, 20-- $100,000 Net purchases, January 1 through August 5 420,000 Net sales, January 1 through August 5 732,000 Normal gross profit as a percentage of sales 40 %

Explanation / Answer

Gross profit

= Sales x Gross profit ratio

= $732,000 x 40%

= $ 292,800

Now, Net Sales – Cost of goods sold = Gross profit

So, Cost of goods sold = Net Sales – Gross profit

= $732,000 - $ 292,800

= $ 439,200

Now, Beginning Inventory + Net purchases – Closing inventory = Cost of goods sold

So, Closing Inventory

= Beginning Inventory + Net purchases - Cost of goods sold

= $100,000 + $420,000 - $ 439,200

= $80,800

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