On May 1 of the current year, Peck Company experienced a 500 year flood which destroyed the company's entire inventory. The company had not completed its month end reporting for April and must estimate the amount of inventory lost. At the beginning of April, the company reported beginning inventory of $215,450. Inventory purchased during April (until the date of the disaster) was $192,530. Sales for the month of April were $542,500. Assuming the company's typical gross profit ratio is 40%, estimate the amount of inventory destroyed in the flood.
A) $87,480
B) $134,520
C) $109,980
D) $82,480
E) $81,480

Question

Quizplus · Accepted Answer

To estimate the inventory destroyed, we first calculate the cost of goods sold (COGS) and then the ending inventory before the flood. The gross profit ratio is 40%, which means the COGS ratio is 60% (100% - 40%). Sales for April were $542,500, so COGS is 60% of that, which equals $325,500 (0.60 * $542,500). The beginning inventory was $215,450, and purchases were $192,530, so the goods available for sale were $407,980 ($215,450 + $192,530). The estimated inventory destroyed (ending inventory) is the goods available for sale minus COGS, which equals $82,480 ($407,980 - $325,500).

On May 1 of the Current Year, Peck Company Experienced