In: Accounting
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 |
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. |