A company lost all but $50 of its inventory in a fire on Feb. 22, 2017. The comp
ID: 2409588 • Letter: A
Question
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.)
$240
$360
$ 60
$150
$110
A.$240
B.$360
C.$ 60
D.$150
E.$110
Explanation / Answer
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.