The following information appears in Olsen Company's records for the year ended December 31:

On December 31, a physical inventory revealed that the ending inventory was only $210,000. Olsen's gross profit on net sales has remained constant at 30 percent in recent years. Olsen suspects that some inventory may have been pilfered by one of the company's employees. At December 31, what is the estimated cost of missing inventory?

Question

The following information appears in Olsen Company's records for the year ended December 31:

On December 31, a physical inventory revealed that the ending inventory was only $210,000. Olsen's gross profit on net sales has remained constant at 30 percent in recent years. Olsen suspects that some inventory may have been pilfered by one of the company's employees. At December 31, what is the estimated cost of missing inventory?

Quizplus · Accepted Answer

Based on the information provided, Olsen's ending inventory should have been $300,000 ($1,500,000 net sales x 70% cost of goods sold). However, the physical inventory revealed that the actual ending inventory was only $210,000. This means that $90,000 ($300,000 - $210,000) of inventory is missing.

Since Olsen's gross profit on net sales has remained constant at 30%, the missing inventory is estimated to have a cost of $82,500 ($90,000 / 70% = $128,571.43; $128,571.43 x 30% = $38,571.43 cost of missing inventory, which when added to the actual ending inventory of $210,000 gives $248,571.43 total estimated ending inventory; $300,000 - $248,571.43 = $51,428.57 estimated gross profit loss due to missing inventory; $51,428.57 / 70% = $82,500 estimated cost of missing inventory). Therefore, the estimated cost of missing inventory is $82,500.

The Following Information Appears in Olsen Company's Records for the Year