The Sara Company's inventory was partially destroyed on July 4, 2010, when its warehouse caught on fire early in the morning.Inventory that had a cost of $8, 000 was saved.The accounting records, which were located in a fireproof vault, contained the following information: $\begin{array}{ll}
\text { Sales }(1 / 1 / 10 \text { through } 7 / 3 / 10) & \$ 260,000 \
\text { Purchases }(1 / 1 / 10 \text { through } 7 / 3 / 10) & 190,000 \
\text { Inventory }(1 / 1 / 10) & 40,000\\text { Grossprofit ratio }&30 \% \text { of cost}
\end{array}$ Using the gross profit method, what is the estimated cost of the inventory destroyed by the fire?

Question

Quizplus · Accepted Answer

The gross profit ratio is 30% of cost. This means that the cost of goods sold is 70% of sales. The cost of goods sold for the period from January 1 to July 3 is 70% of $260,000, or $182,000. The inventory on hand at the beginning of the period was $40,000. The cost of goods purchased during the period was $190,000. The total cost of goods available for sale during the period was $40,000 + $190,000 = $230,000. The cost of goods sold was $182,000. The cost of the inventory destroyed by the fire is $230,000 - $182,000 - $8,000 = $40,000.

The Sara Company's Inventory Was Partially Destroyed on July 4