Question

On September 1 of the current year, Scots Company experienced a flood that destroyed the company's entire inventory. Because the company had not completed its month end reporting for August, it must estimate the amount of inventory lost using the gross profit method. At the beginning of August, the company reported beginning inventory of $215,800. Inventory purchased during August was $192,670. Sales for the month of August were $543,200. Assuming the company's typical gross profit ratio is 40%, estimate the amount of inventory destroyed in the flood.

Select one:

a. $87,550

b. $81,550

c. $82,550

d. $134,730

e. $191,190

Answer 1

Ending inventory is the cost of goods on hand at the end of a particular period. The total cost of this inventory is used to receive the cost of goods sold of a business that uses the periodic inventory system. Under the periodic system, the cost of goods sold is found out on the basis of following formula:

Cost of goods sold = Beginning inventory + Purchases - Ending inventory

So, first we find out cost of goods sold i.e. sales minus gross profit.

Cost of Goods Sold

Sales	$ 543,200
Less: 40 % Gross profit	$ 217,280
Cost of Goods sold	$ 325,920

Ending inventory

Opening Inventory	$ 215,800
Add: Inventory Purchase	$ 192,670
Total inventory available for sales	$ 408,470
Less: Cost of Goods sold ( Inventory Sold)	$ 325,920
Ending inventory	$ 82,550

So (C) option is right answer amount of inventory destroyed in flood was $ 82,550.