So. California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2009. In preparing their insurance claim on the inventory loss, they developed the following data: Inventory January 1, 2009, $300,000; sales and purchases from January 1, 2009, to May 1, 2009, $1,300,000 and $875,000, respectively. So. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2009, is:
A)$302,500.
B)$360,000.
C)$395,000.
D)$455,000.

Question

Quizplus · Accepted Answer

The estimated inventory is calculated by determining the cost of goods sold (COGS) and subtracting it from the cost of goods available for sale. The gross profit is 40%, so the cost percentage is 60%. Sales from January 1 to May 1 are $1,300,000, so COGS is 60% of that, which is $780,000. The cost of goods available for sale is the beginning inventory ($300,000) plus purchases ($875,000), totaling $1,175,000. Subtracting COGS ($780,000) from this gives an estimated inventory of $395,000.

So California Inc