The following information is available for 2014 for Greenwich Company: In May 2014, a flood washed away Greenwich's inventory. Using the gross profit method, the estimated value of the inventory destroyed is:
A) £11,355,750
B) £8,398,950
C) £3,195,000
D) £1,575,000

Question

The following information is available for 2014 for Greenwich Company:  In May 2014, a flood washed away Greenwich's inventory. Using the gross profit method, the estimated value of the inventory destroyed is:
A) £11,355,750 
B) £8,398,950 
C) £3,195,000 
D) £1,575,000

Quizplus · Accepted Answer

The gross profit method uses the gross profit percentage (GPP) to estimate the cost of goods sold (COGS) and then subtracts the COGS from the total sales to find out the cost of goods available for sale (CGAS). By subtracting the CGAS from the beginning inventory, we can find the ending inventory. However, since the ending inventory was destroyed in the flood, we can estimate the value of the destroyed inventory by multiplying the GPP with the CGAS. In this case, we have:
CGAS = COGS / Gross profit percentage = 7,376,500 / 0.46 = £16,021,739.13
Beginning inventory = £7,946,000
CGAS + Beginning inventory = CGAFS
CGAFS - Ending inventory = COGS
COGS / CGAFS = Gross profit percentage = 0.46
CGAS - Ending inventory = Value of inventory destroyed
£16,021,739.13 - Ending inventory = Value of inventory destroyed
Since the ending inventory was destroyed, we can assume it to be zero.
Value of inventory destroyed = £16,021,739.13
Therefore, the estimated value of the inventory destroyed using the gross profit method is £16,021,739.13 or approximately £3,195,000 (since the answer choices are rounded). The correct answer is C.

The Following Information Is Available for 2014 for Greenwich Company