On March 15, Stark Company's inventory was destroyed by a tornado. The following was the only information salvaged: (1) Inventory, January 1: $31,000 (2) Purchases to Mar 15: $14,000 (3) Sales to Mar 15: $65,000 (4) Sales returns to Mar 15: $7,000 Stark's average gross profit ratio is 35%. What is the estimated value of the destroyed inventory?

Question

Quizplus · Accepted Answer

To estimate the destroyed inventory, calculate the cost of goods sold (COGS) using the gross profit ratio. Sales net of returns are $58,000 ($65,000 - $7,000). Gross profit is 35% of sales, so COGS is 65% of sales: $58,000 * 0.65 = $37,700. Beginning inventory plus purchases equals $45,000 ($31,000 + $14,000). Estimated inventory is $45,000 - $37,700 = $7,300.

On March 15, Stark Company's Inventory Was Destroyed by a Tornado