Question

In: Accounting

A company lost all but $50 of its inventory in a fire on Feb. 22, 2017....

A company lost all but $50 of its inventory in a fire on Feb. 22, 2017. The company’s financial records are listed below:

2015                       2016                   

Net Sales                     10,000                      12,300                   

COGS                           6,500                        7,995                   

       Gross Profit                  3,500                        4,305                   

       Operating Exp.             2,000                        2,500                   

       Net Income                   1,500                        1,805                   

              For 2017 the company’s records showed beginning inventory of $350, purchases of $500 and purchase returns of $90.  

        Net sales for the first part of the year totaled $1,000.

    

      Determine the amount of inventory destroyed in the fire. (You must first calculate the company’s historical gross profit percentage.)

A.

  $240
B.

  $360
C.

$ 60  
D.

  $150        
E.

  $110

Solutions

Expert Solution

Solution:
Answer is C. $60
Working Notes:
Gross profit rate for 2015 = Gross profit of 2015/sales of 2015 = 3500/10,000 = 0.35 = 35%
Gross profit rate for 2016 = Gross profit of 2016/sales of 2016 = 4,305/12,300 = 0.35 = 35%
Beginning inventory of 2017 =$350
Net purchases = purchase - purchase return = $500 -$90 =$410
Sales =$1000
Gross profit ratio = 35%
therefore cost of goods sold = Sales (1-gross profit ratio)
=1,000 x (1.0.35)
=$650
Ending inventory February = Beginning + net purchases - Cost of goods sold
=350 + 410 - 650
=110
Inventory destroyed in the fire = Ending inventory - $50 (but means except $50)
=$110 - $50
=$60
But $50 means expect $50 inventory all inventory on that day was destroyed
Please feel free to ask if anything about above solution in comment section of the question.

ekkarill92 answered 2 years ago
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